This section provides a selection of media items from October 2012.
ON THIS PAGE:
AUSTRALIANS could pay a travel levy for foreign trips and higher fees for passports under a plan to offset the soaring costs of helping those who get into strife overseas.
A damning parliamentary report has found Australia’s diplomats have had three decades of ”chronic underfunding”, just as the Gillard government launches a new blueprint for developing ties with Asia.
The report finds the growing burden of consular support for the thousands of Australians in trouble overseas – including high-profile cases such as Melinda Taylor, the lawyer imprisoned in Libya – is limiting the ability of diplomats to properly represent the country.
Last year, the Foreign Affairs Department helped about 14,500 Australians in difficulty, such as those who were arrested overseas, and more than 200,000 Australians needed some form of minor consular help, such as for lost passports.
The joint standing committee on foreign affairs, defence and trade report, released yesterday, called on the government to set up an extra 20 embassies and consulates. It says consular services should be funded in part by revenue from increased passport fees or ”other modest travel levies”.
Committee chairman and Labor backbencher Nick Champion declined to put a dollar figure on the levy, but indicated that a small charge to the estimated 7 million Australians travelling overseas each year would be adequate.
The report also suggests a tiered levy, to take into account those people who take out travel insurance or who are unable to obtain travel insurance.
Prime Minister Julia Gillard’s long-awaited ”Australia in the Asian Century” white paper promised further investment in overseas representation. The tourist hot spot Phuket in southern Thailand is among three locations identified for new posts. But Labor has given no funding commitments or timeline.
The report, which has bipartisan support, goes further, outlining a plan for a $300 million investment over three years in the diplomatic service.
This would result in an embassy reopening in Kazakhstan along with new posts in Algeria, Angola, Colombia, Norway and Tanzania, several of which would match embassies that these countries have in Canberra.
”I don’t think this is diplomatic chest thumping,” committee member Michael Danby said. ”But Australia is a serious country who should be represented.”
Ordering a schooner at the pub may cost more if proposed alcohol taxation reforms are taken up by the federal government. But it’s a cheaper price to pay than the medical, social and economic collateral damage incurred by harmful booze consumption, a report commissioned by the Foundation for Alcohol and Research and Education (FARE) says.
Alcohol-related problems – including emergency department visits, long-term illness and abuse – are conservatively estimated to cost Australia $15 billion a year.
FARE chief Michael Thorn says increasing taxes across the board, particularly for cheap wine, would cost moderate drinkers more but also generate substantial net benefits for the community, the economy and the health of Australians.
Any delay over proposed changes to the tax system would not be the result of a deficit of evidence, Mr Thorn said at the launch of the report in Parliament House in Canberra on Tuesday.
“Rather it’s a deficit of political leadership,” he said.
“Delaying reform to the alcohol taxation system in Australia is both irresponsible and reckless.
“The government can and should reconsider its position on reform because more people will be harmed if not.”
The report, titled “Bingeing, Collateral Damage and the Benefits and Cost of Taxing Alcohol Rationally”, backs FARE’s push for the abolition of the Wine Equalisation Tax (WET).
Wine is currently taxed on its wholesale value, while other alcoholic beverages are taxed on alcohol content.
“Alcohol taxation reform would improve the efficiency of the Australian taxation system and improve resource allocation efficiency by removing current distortions in favour of cheap wine,” the report said.
About four per cent of Australian adults, deemed to be harmful drinkers, consume just under one third of the country’s alcohol.
Another 85 per cent of Australians are designated as non-drinkers or moderate drinkers.
While increasing taxes on alcohol would mean moderate drinkers would also have to pay more, reform would benefit them and non-drinkers the most, the report says.
Harmful behaviour associated with alcohol consumption, which could be reduced by tax reform, includes abuse and attacks on individual drinkers and others, illnesses like cirrhosis of the liver, and the 50 or more cancers that are accelerated by alcohol consumption.
Last week was quite a big week in tax, although when the dust had settled it was not clear what — if anything — had really happened.
First, the Treasurer announced in the Mid Year Economic and Fiscal Outlook (MYEFO) that tax payments of large companies would be converted from quarterly to monthly instalments. On Wednesday, he announced that Commissioner of Taxation Michael D’Ascenzo will be retiring at the end of this year. The same day, the Treasury Business Tax Working Group issued its draft final report on business taxation. And on Thursday, it was confirmed that the Mining Resource Rent Tax (MRRT) has so far not raised a dollar of revenue for the government.
It’s hard even for tax geeks to get excited about tax instalments. But the government estimate that this change will produce $5.5 billion in the 2013-14 fiscal year and $8.3 billion over the 3 year forward estimates made us all sit up and take notice.
Monthly instalments will commence on January 1 2014 for about 350 companies with $1 billion+ of income a year and a year later for companies with income of $100 million+. These big end companies comprise only 0.2% of companies in Australia, but pay more than 60% of company tax.
Not surprisingly, companies – and many commentators – reacted uniformly negatively to the news. It’s true that the extra $5.5 billion revenue in 2013-14 is mostly a short term fiddle, as this change brings forward into the 2013-14 fiscal year up to a quarter of the following year tax payment. But the extra revenue next year and going forward is also a function of the time value of money. In the longer term, it looks like a smart administrative move. The Treasurer is right that large companies already make monthly GST and wage withholding payments. If company tax is legally owed, why not collect it more smoothly through the year, rather than (in effect) loaning companies the cash out of the public purse?
A monthly instalment system is novel. The global standard is quarterly company tax instalments – for example, both the US and UK operate quarterly systems. But if Australia can get this working at the big end of town, other cash-strapped governments might follow suit. It’s less clear that a monthly system should be extended to companies with turnover of $20 million+ a year (to commence on 1 January 2016). Much less revenue is at stake, and the cash flow issues for these businesses are more stark.
This shift to monthly instalments is possible in part because of the work of Commissioner Michael D’Ascenzo, who has done an impressive job stewarding the Australian Tax Office over his seven year term. In this time, D’Ascenzo has overseen an upgrade of key administrative systems of tax collection, including substantial new computing power that facilitates previously impossible data-matching, payment and refund processing, as well as sophisticated risk-based audit. This new computing system, although still going through some hiccups and implementation issues, should enable the government to actually administer a monthly instalment system for company tax.
Meanwhile, the Treasury Business Tax Working Group quietly released its “Draft Final” report, sans recommendations. This unusual step enables public viewing before sending it to the Treasurer. The Working Group was established after the Tax Forum of October 2011, including among others representatives from large business, the Australian Council of Trade Unions and the tax profession. Its main brief was to consider how to cut the company tax rate (currently 30%) on a revenue-neutral basis, fully funded by other reforms to the business tax base. The Review of Australia’s Future Tax System (AFTS) had recommended a cut to 25%, and the government proposed (then delayed) a cut to only 29%. Some of the possible “savings” include tightening cross-border debt safe harbours for business; removing the research and development or exploration tax concessions; or modifying depreciation of assets.
The Working Group report pulls no punches. It has signally – and explicitly – failed in this task. After much consultation and, no doubt, robust discussion, they note the “considerable debate and uncertainty” about winners and losers from a company tax cut funded by removal of concessions. They conclude, dryly, that “there is a lack of agreement in the business community to make such a trade-off”.
The AFTS Review suggested that Australia’s company tax is borne partly by labour – in fewer Australian jobs and lower wages – as well as by capital. But empirical evidence is lacking. A recent US report by the Urban-Brookings Tax Policy Center attempts to put some numbers to this analysis. It now builds into its models an assumption that 20% of company tax is borne by labour, 20% is on the “normal” return to capital, and a whopping 60% is “super profit” or above-normal rates of return.
According to economic theory, we should be able to tax corporate super profit at nearly 100% and not deter investment. But legally and administratively, that is hard to do. The situation of Australian companies may also be different, given the very valuable intellectual property owned by American companies. In this light, however, the current 30% tax rate seems like a crude but reasonable compromise.
Finally, last week we learnt the MRRT has so far failed to raise any revenue for the government. Some of this is down to lower commodity prices, and price projections that were far too rosy. The MRRT is supposed to capture some of that corporate “super profit”. This result suggests a sad outcome of hasty compromises between big miners and government on the rate of the MRRT, the very high uplift factor for investment, too generous valuation thresholds for existing projects and the exclusion of all minerals except iron ore and coal. It’s a salutary lesson of how not to do tax reform.
The current language of business tax reform is “international competitiveness”, and this is picked up by the Working Group. But we should not be distracted by this slogan. The Working Group report is a start: there are no easy fixes. Business tax reform requires more research into the economic and distributional issues to generate an acceptance of basic principles which we don’t yet have, and a nationwide public debate.
Labor says it won’t change the design of the mining tax in another term of government even if the levy fails to raise its projected revenue.
Trade Minister Craig Emerson said that it was not possible to be “absolutely certain” about the money raised from the minerals resource rent tax, but that it would not be beneficial to keep “tinkering” with its design if Labor were re-elected next year.
“No, we have no plans for doing that (changing the design),” Dr Emerson told Sky News’s Australian Agenda program.
“This is a good design for this tax. I am happy with the tax design and . . . we should not keep modifying the tax design.
“This is one of the key features in theory and practice of profits-based taxes. They are stable over time because when profits are high they collect a good share of revenue for the people.
“When profits are low they reflect that reality as well, so you don’t need to keep tinkering with them.”
The Australian revealed last week that the MRRT had failed to raise any revenue in its first three months of implementation from the big three miners.
None of Australia’s major miners — BHP Billiton, Rio Tinto or Xstrata — had any liability under the minerals resource rent tax so far in 2012-13 and the government did not receive any revenue by last Monday’s payment deadline.
Opposition treasury spokesman Joe Hockey said Australia’s reputation had been damaged by the introduction of the MRRT and it would still impact the resources sector even if no revenue were gained.
“It does hurt (mining companies) because it costs millions of dollars in accounting fees,” he told ABC’s Insiders program.
“It also has big impacts on our sovereign risk. Our international reputation has been impacted by the introduction of a tax on mining; there is no doubt about that.”
Mr Hockey said the poor structure of the tax would have a serious impact on the budget.
He reiterated the Opposition stance that if elected in 2013, it would not continue any programs or policy by Labor that had been paid for by the MRRT.
“In our case, we’ve said we cannot support tax cuts funded by the mining tax or payments supported by the mining tax because we do not support the mining tax,” Mr Hockey said. “So we are entirely consistent in our principles.”
Minerals Council of Australia spokesman Ben Mitchell told The Australian the mining tax should not be changed because it was acting in the way it had been designed. “The mining industry continues to pay billions and billions of dollars on taxes and royalties aside from the MRRT,” he said.
In a capitalist economy such as ours, the rich have loads of money, the poor have next to none and the government does little about it.
Is that what you suspect? It’s a long way from the truth. While some (including me) may argue they could be doing more, between them our governments – federal and state – are doing a lot more to redistribute income from the rich to the poor than many people imagine.
The reason so few people realise this is the system that brings it about is very complex. To see what’s going on requires a special study – which is just what the Bureau of Statistics does every six years.
In its publication, Government Benefits, Taxes and Household Income, the bureau uses several of its surveys to take all the taxation we pay – federal and state – and attempt to attribute it to households of differing incomes. It does the same for all federal and state government spending.
But not all the taxes we pay can be attributed to households – company tax, for instance. Similarly, not all government spending can be attributed – spending on defence or roads, for instance.
In the latest study, for 2009-10, it managed to attribute $194 billion, or 62 per cent, of total government revenue and $234 billion, or 51 per cent, of total government spending.
It ranks households lowest to highest according to their income, dividing them into five ”quintiles” (groups of 20 per cent). This is handy because, if income was equally distributed, each quintile would have a 20 per cent share of total income. So you can judge how unequally income is distributed by comparing each quintile’s actual share with that 20 per cent benchmark.
Households start out with ”private income” – income they’ve earned themselves from wages, investments or any unincorporated business they may own. Then the government gives them cash benefits (such as the pension, the family tax benefit or the dole) and benefits in kind (such as free or subsidised education, healthcare, subsidised childcare and public housing).
But governments also take money away from households in the form of income tax and indirect taxes (such as the goods and services tax, several sin taxes and various state taxes).
Allow for all these things and you end up with households’ ”final income”. So how much does all the governments’ taxing on the one hand and spending on the other end up changing people’s incomes?
Quite a bit. The poorest quintile is composed mainly of pensioners and people on the dole. Its share of total private income is less than 5 per cent, whereas its share of total final income is more than 7 per cent.
The second poorest quintile (composed mainly of self-funded retirees and the working poor) has its share of total income increased from 9 per cent to 13 per cent.
The middle quintile (composed mainly of working families) has its share raised from 15 per cent to 17 per cent.
The second-highest quintile’s share is virtually unchanged at 23 per cent. But get this: the highest quintile (mainly two-income couples without dependants) has its 48 per cent share of private income reduced to 40 per cent of final income.
So the system of taxes and benefits takes 8 percentage points of total income from the top 20 per cent of households and redistributes it to the bottom 60 per cent.
But how exactly does it bring this about? For a start, income tax is ”progressive” – it takes a progressively higherproportion of tax as income rises.
The bureau’s figures show income tax takes about 8 per cent of the private income of households in the lowest quintile but the proportion steadily increases until you get the highest quintile, which loses more than 19 per cent.
(If that last proportion seems low, remember income tax is levied on the incomes of individuals, not households. Most top households would have two income-earning individuals, probably with one partner earning a lot more than the other, thereby lowering their average tax rate.)
Of course, you’d expect the progressive effect of income tax to be offset by the ”regressive” effect of indirect taxes. A regressive tax takes a higher proportion of low incomes than high incomes.
And that’s just what the bureau’s figures show. On average, households in the lowest quintile lose 19 per cent of their ”gross income” (private income plus cash benefits) in indirect taxes. That proportion falls steadily until you get to the highest quintile, which loses less than 8 per cent.
So what’s the story when you put the two types of tax together to examine the effect of the total tax system? You find the tax burden as a proportion of gross income is very roughly U-shaped. The lowest quintile loses 24 per cent, but then the proportion drops to 22 per cent before slowly rising to reach 27 per cent for the highest quintile.
Clearly, the total tax system does surprisingly little to redistribute income from the top to the bottom.
See what that means? Though few people realise it, most of the redistribution done by the budget comes not from its tax side but from its spending side.
That’s particularly the case with cash benefits which, after all, are tightly means-tested. The cash benefits received by households in the lowest quintile are equivalent to 47 per cent of their private income.
But that proportion falls sharply until you get to the highest quintile, whose cash benefits add just 2 per cent to their private income. Mental note for all lefties: means-testing makes the cash benefits system highly progressive.
By contrast, most benefits in kind are provided on a universal basis – that is, without means-testing. That’s true of healthcare and education spending. So you wouldn’t expect their distribution to be particularly progressive.
You wouldn’t expect it, but for some reason it is. The in-kind benefits received by the lowest quintile are equivalent to 53 per cent of private income. But that proportion falls sharply to reach just 12 per cent of the highest quintile’s private income.
All told, the whole tax and benefits system adds an average of $241 a week to the incomes of the bottom 20 per cent of households but subtracts an average of $484 a week from the incomes of the top 20 per cent. That’s quite a redistribution.
Julia Gillard’s “Asian Century” white paper, to be released on the weekend, will provide a blueprint for how Australia should go about integrating with Asia. There is no doubt that we need to set a broad framework for making the most of our Asian opportunities. But to do this, we also need to focus on fixing domestic economic policy, which is becoming more of a shambles.
A forecast puny budget surplus engineered through cynical creative accounting. A collapse of the process designed to deliver Labor’s supposed priority of a cut to the 30 per cent corporate tax rate. Then news that Labor’s bastardised mining tax – the one that helped bring down Kevin Rudd and which has already been earmarked to pay for legislated spending commitments – is not raising any money. As former treasurer Peter Costello noted in this newspaper, it takes a special talent to design a tax that raises no money.
Amid all the talk from Treasurer Wayne Swan about Labor’s budget discipline, the federal government is still running a large structural deficit that is now being exposed by weaker commodity export prices, as economics editor Alan Mitchell points out today. Yet Labor is piling on new spending commitments outside its four-year budget horizons. These threaten to collide, as Mr Costello points out, with the budget shock from the aging baby boomer demographic.
And genuine tax reform has been poisoned by Labor’s refusal to consider raising more consumption tax through a GST, by the debacle of its mining tax and now by the bad blood with business over its promised corporate tax rate cut. The events of this week have unmasked the government’s fiscal and tax reform policy to be incoherent, and a triumph – if that is the word – of politics over proper policy making. This became obvious early in the week, when Mr Swan released the Mid-Year Economic and Fiscal Outlook statement and revealed a raft of new revenue which he insisted on describing as budget “saves”.
Closer scrutiny of the MYEFO statement showed that, as reported in the Weekend Financial Review, the vast bulk of the budget “saves” are revenue gains from one-off timing shuffles and expected revenue from more aggressive enforcement of existing tax laws. It is true that cuts to middle-class welfare – paring back the baby bonus and private health insurance rebates – will cut government spending over the long term. However, shifting the timing of company payments, so that companies have to pay tax monthly instead of quarterly, as well as a crackdown on tax avoidance and the seizing of unclaimed or lost super superannuation accounts after just one year rather than five years, accounted for $13 billion in extra revenue over four years.
The next body blow to the government’s credibility was news that its deeply flawed minerals resources rent tax would probably not raise any revenue in the first quarter of this financial year, and possibly none through the entire financial year, and that Mr Swan had been warned of this four months ago. The MYEFO forecast $2 billion worth of revenue from the first quarter from the mining tax and has already allocated that money to spending.
Treasury estimates in the MYEFO cut the four-year revenue estimate for the tax by 32 per cent to $9.1 billion. But nothing was said about falling resources prices eliminating revenue entirely in the first year. On top of that disaster, and the MYEFO statement which showed that the government has no solutions to the problem of producing a surplus apart from using accounting tricks, was the report of the Business Tax Working Group. It this week concluded it could not find sufficient savings in business tax concessions to pay for an overall corporate tax cut. The result was not surprising given the working group’s severely constrained brief, but also indicates how much the business sector distrusts the government.
The government originally promised a cut of 2 percentage points in the company tax rate of 30 per cent, to be paid for from resources tax revenue.
However, the government spent the money it expected to get from the resources tax on voter handouts instead, to shore up its position.
Having failed to deliver the cut, the government formed the working group in October last year with the brief that it should negotiate cuts in business tax concessions to pay for a 1 percentage point reduction in the company tax rate. But the group could not agree on a revenue neutral package and said cutting accelerated depreciation would have disastrous results for resources sector investment. It is now clear that no business sector was willing to lose its concessions, as few trust the government to deliver company tax rate cuts.
A coherent plan aimed at positioning this country to take advantage of opportunities in Asia is certainly welcome. But given that tax and fiscal policy has fallen into such disastrous disarray, there is no reason to believe that the Gillard government’s Asian white paper will have any credibility either.
Mr Swan seems to be punting that Labor will be rescued by deeper interest rate cuts from the Reserve Bank.
But this week’s larger than expected inflation result has upset this strategy, exposing Labor’s failure to promote productivity-enhancing policy reforms.
New US growth figures have brought the economy back to centre stage in the US presidential campaign.
The world’s largest economy grew at an annual pace of two per cent in the July to September quarter, slightly more than economists had predicted.
With just 11 days until the presidential election, Republican candidate Mitt Romney says the economic growth figure is “discouraging”. However, president Barack Obama’s campaign says it is more evidence that under the current administration, the economy is recovering from the worst recession since the Great Depression.
A rise in consumer and federal government spending is behind the larger than expected boost.
The stronger pace of expansion, however, fell short of what is needed to make much of a dent in unemployment, and offers little cheer for the White House ahead of the closely contested November 6 presidential election.
Both sides of the political contest pounced on the news.
“We received, by the way, the latest round of discouraging economic news. Last quarter our economy grew at just two per cent,” Mr Romney said.
“Slow economic growth means slow job growth and declining take-home pay. This is what four years of President Obama’s policies have produced.”
White House adviser Alan Krueger said the report underscored the need to extend tax cuts for the middle class and small businesses, as Mr Obama has proposed.
“While we have more work to do, together with other economic indicators, this report provides further evidence that the economy is moving in the right direction,” Mr Krueger said.
‘Weak forward momentum’
Since climbing out of the 2007-09 recession, the economy has faced a series of headwinds from high gasoline prices to the debt turmoil in Europe and, lately, fears of US government austerity.
Gross domestic product expanded at a 2 per cent annual rate, the Commerce Department said on Friday in its first estimate of the third quarter, up from the second quarter’s 1.3 per cent pace.
A pace in excess of 2.5 per cent is needed over several quarters to make substantial headway cutting the jobless rate.
It has struggled to exceed a 2 per cent growth pace and remains about 4.5 million jobs short of where it stood when the downturn started. The report was a bit better than economists had expected, in part because of a surge in government defence spending that was not expected to last.
Defence spending rose at its fastest pace in three years, combining with the rise in household consumption and a jump in home building to strengthen domestic demand.
Consumers also shrugged off the impending sharp cuts in government spending and higher taxes that are due next year to go on a minor shopping spree, with spending strong for cars and Apple iPhone 5.
Consumer spending, which accounts for about 70 per cent of US economic activity, grew at a 2 per cent rate after increasing 1.5 per cent in the prior period.
A second report showed consumer sentiment reached its highest point in five years, another sign households are little worried by the so-called fiscal cliff that is set to drain about $600 billion from the economy in 2013 unless Congress acts.
“The economy still has only weak forward momentum,” chief US economist at IHS Global Insight said.
“Some underlying fundamentals are improving, but uncertainty at home and abroad is holding back the business sector.”
Treasurer Wayne Swan was warned four months ago the minerals resource rent tax wouldn’t raise any revenue in the first quarter and possibly throughout the rest of the financial year, threatening Labor’s budget surplus.
Senior Treasury and Finance officials yesterday told The Australian Financial Review the government was told as early as June the tax – which the Gillard government has nominated as one of its top legislative achievements – wouldn’t raise anything in the first quarter and the near-term outlook for profits was clouded by falling commodity prices and the high dollar.
The government is waiting for precise advice from the Australian Tax Office about how much the 22.5 per cent tax on iron ore and coal raised in the first quarter. It is understood only three people have an idea of the figure: Mr Swan, Tax Commissioner Michael D’Ascenzo and Treasury Secretary Martin Parkinson.
“We feared nothing would be raised in the first quarter – you don’t have to be Einstein to join the dots,” a government official said. “It’s also possible nothing would be raised this financial year but we won’t know that until very late in 2013 – it depends on prices, currency and volumes.”
The tax, which was personally negotiated by Mr Swan and Prime Minister Julia Gillard, funds billions of dollars of programs. A shortfall could force the government to draw money from other areas or jettison its long-held plans for a surplus.
Greens and independent MPs said the tax should be renegotiated if Parliament had been “stitched up” by the big mining companies which cut the deal with the government: BHP Billiton, Rio Tinto and Xstrata.
“We are supposed to be sharing the wealth,” independent Rob Oakeshott said. “We need to take another look at it, and this time Treasury needs to be included in the negotiations.”
The low returns are embarrassing for Mr Swan and Ms Gillard, who used the turmoil triggered by a revolt against an earlier version of the tax to remove Kevin Rudd as Labor leader. Ms Gillard’s deal with the mining industry, which reduced the scope of the tax, was presented as proof of her skill as a negotiator.
The first quarter tax payments won’t be revealed until December. Total revenue for the financial year won’t be known until the final three months of 2013, when an election is due.
BHP Billiton, Rio Tinto and Xstrata have assessed their payments for 2012-13 and should have paid their first-quarter bills, which this week’s Mid-Year Fiscal Outlook forecast at $2 billion. Falling coal and iron ore prices cut the forecast for revenue from the tax in its first four years by 32 per cent to $9.1 billion.
Government Knew it was coming: Hockey
“The government knew this was coming and brought forward Monday’s budget announcement to avoid revealing the true state of the mining tax,” Shadow Treasurer Joe Hockey said.
“Wayne Swan has defrauded the Australian people and now the government has some explaining to do.”
Companies will assess their full-year liability each quarter and pay a portion of that, with the ATO assessing over or under payments at the end of next June.Mr Swan wouldn’t say whether any money was raised in the first quarter.
“A profits-based tax is one that delivers revenue when prices are really high, and when prices are really low it doesn’t deliver the revenue,” he said in Brisbane.
Asked to comment about the June warning, Mr Swan’s spokesman said he doesn’t discuss the tax affairs of individual companies.
Targets might still be hit
Companies discussed the MRRT yesterday with the government and indicated privately that one bad quarter didn’t necessarily jeopardise the full-year forecasts.
Iron ore prices fell 48 per cent between June 30 and September 5 and have risen 27 per cent since then. Coking coal has fallen 32 per cent since June 30. Thermal coal has dropped 9 per cent over the same period.
Rio Tinto said the first quarter of the tax coincided with the lowest iron ore prices since the global financial crisis. “This has had an impact, both on company profits and on the government’s MYEFO forecasts,” a spokesperson said.
The company, Australia’s largest iron ore producer, said the amount it pays over the full year will depend on what happens to iron ore and coal prices, exchange rates, costs, and other factors.
The MRRT is a super profits tax, when profits are high companies will pay more, when profits are low they will pay less.BHP Billiton wouldn’t disclose its MRRT payments, but pointed out that because it is a profits-based tax the drop in commodity prices and the higher dollar had cut its tax bill.
“The amount Rio pays over the full year will depend substantially on how iron ore and coal prices recover and what happens over coming months with exchange rates, costs and other factors.”
While the structure of the tax is the same as when it was announced in 2010, “the external environment has changed considerably since that time,” a BHP spokeswoman said.
“The Australian dollar and commodity prices in particular have experienced significant volatility over this period and these have a direct bearing on MRRT payable,” she said.
“Unlike mining royalties – where we pay a levy on every tonne of coal we sell – MRRT is a profits-based tax, designed to generate significant revenues when the industry is thriving,”
BHP Overpayment to protect Government unlikely
Suggestions in the media BHP might make a one-off overpayment to protect the government from embarrassment are understood to be inaccurate, given the company’s financial responsibility to its shareholders.
An Xstrata Coal spokesman said: Xstrata said the coal industry was facing significant challenges and while royalties were paid on tonnage, MRRT was paid on profits.“The Australian coal industry is facing considerable challenges – including low prices, high input costs and the continued strength of the Australian dollar – which will be reflected in the initial MRRT revenues.”
The tax was designed to replace less-efficient state royalties, which the industry complained were based on volumes, instead of profits. Mining companies get a refund from the federal government for the royalties.
Industry sources said it is intended to be a “top-up” tax levied in addition to the taxes and charges that companies already pay and that state and territory royalties still have to be paid although are offset against any liability under the federal tax.
The West Australian, NSW and Queensland governments have increased their royalty rates in the past year. There was a hike in royalties on iron ore fines in WA to 6.5 per cent on July 1 this year. That rate will rise to 7.5 per cent a year later.
Queensland coal royalties have increased to 12.5 per cent from 10 per cent for coal valued at $100-$150 per tonne, with an additional 15 per cent royalty for higher valued coal.
Standard & Poor’s Ratings Services yesterday revised its outlook on the State of Western Australia to negative.
“We consider that WA’s increased budgetary reliance on royalties and the strong rises in its expense base, combined with the time-lag in GST relativity adjustments that offset reductions in own-source revenues, may pose challenges for WA’s budgetary performance in the short-to-medium term,” said credit analyst Claire Curtin.
Controversial changes to the anti-avoidance provisions of the Income Tax Assessment Act which affect tax benefits obtained through mergers or demergers are unlikely to be introduced in October as planned.
Following a series of court losses by the tax office over the past two years, in March the federal government agreed to make retrospective changes to Part IVA of the Income tax Assessment Act. But the changes that will be introduced have yet to be revealed.
Legislation was due to be introduced in October, but an expert panel that includes members of the ATO, Treasury Department and tax specialists is still consulting on the amendments after six months of deliberations.
A spokesperson for the Treasury says constructive roundtable discussions with industry representatives, legal experts and academics are “at an advanced stage and are continuing”.
“Once a preferred approach has been settled upon, the government will be consulting with the public on the draft amendments, through the usual Treasury public consultation processes for draft taxation legislation.”
Sue Williamson, a partner at Ernst & Young, says it seemed unlikely the legislation could be introduced before the Autumn sitting of Parliament next year.
“We have eight days left of the Spring sitting and we have had no consultation [on the proposals yet],” she says. “Maybe what they will do is get a draft out for consultation and then have an Autumn introduction.”
Treasury said “the government has been working towards introduction in the Spring sittings of Parliament while at the same time recognising that these are complex reforms and it is important that issues raised through consultation are worked through”.
Although it wasn’t holding up transactions, Williamson says In the meantime “we are in this great time of uncertainty”.
In May, the ATO’s deputy chief tax counsel Des Maloney said the case that made it clear a change to the legislation was needed involved James Hardie and RCI Pty Ltd in RCI Pty Ltd v Commissioner of Taxation.
In the case the commissioner argued a dividend paid by a subsidiary of RCI six months before the subsidiary was sold to James Hardie was made to reduce the capital gain of the sale for RCI and reduce the tax it should pay on the gain.
This was upheld by the Federal Court, but rejected on appeal to the full Federal Court. The ATO’s application for leave to appeal to the High Court was denied.
Maloney says this confirmed a new precedent had been set that had made the Part IVA provisions ineffective.
Williamson says given the determination of the government to make changes to the law it was very important whatever the outcome, to document comprehensively the chief commercial reasons for conducting a transaction, and what alternative actions were available at the time.
This is because the cases made by the ATO under Part IVA rely on the “counterfactual” arguments put by each side in a court case, or what would have been done if there was no tax benefit.
“I have seen cases where an adviser will write to a client and say these are commercial reasons why you did this,” she said. “That’s really not the way to do it, it needs to be the commercial objectives of the client.”
“It is really important to be thinking about what the options are and they should be documented.”
A business tax working group says a cut of two to three percentage points to the company tax rate could be funded through changes to the tax treatment of interest, capital allowances and research and development spending.
However the group, set up by the Gillard government after the Tax Forum in October 2011, said despite consultation with 20 groups and receiving more than 80 submissions it could not recommend a specific revenue-neutral way to lower the company tax rate.
“It was clear to the working group that there was not agreement in the business community to broaden the business tax base to fund a cut in the company tax rate at this time,” the report found.
Lower corporate tax would increase Australia’s ability to attract foreign investment and have other economic benefits in terms of higher profits and real wages and lower prices, the final draft report by the working group released on Wednesday says.
The group said the cut should be made “as economic and fiscal circumstances permit”.
“This would need to be considered against other budget priorities and should take into account the overall mix of business taxation,” the report said.
A one percentage point cut in the company tax rate could raise GDP and real wages by around 0.2 per cent, the group said.
Shadow Treasurer Joe Hockey says it shows Labor’s tax reform is in chaos.
“The business tax working group was set an impossible task to find a way of hiking taxes to fund a cut,” he said in a statement on Wednesday.
“How can the business community have any confidence in a government that blindsided them on Monday when Wayne Swan lacked the courtesy to even consult with the Business Tax Working Group over the changes to company tax schedules announced in the Mid Year Economic and Fiscal Outlook?”
Mr Hockey said a genuine company tax cut is one funded from savings in the budget not by raising other taxes to pay for it.
The tax institute also said they were disappointed by the end of the opportunity for company tax reform.
The most important figure in the mid-year economic and fiscal outlook is in a table on page 56. It shows that unexplained variations to the budget estimates will cut spending in 2012-13 by almost $3 billion.
By definition, these variations are not due to changes to policy, the state of the economy, or in the costs of individual programs. Yet they are the reason why we will have a budget surplus of $1.1 billion, rather than a budget deficit of $1.9 billion.
But what are they? No information is given. We the taxpayers provide the money for this, but are kept in the dark about where and why $3 billion of planned spending suddenly will no longer happen. These unexplained spending cuts are the reason why the battered 2012-13 budget is still expected to end up in surplus.
It typifies the murky, spin-driven way in which governments now present the nation’s accounts – and allow economic decisions to be driven by political imperatives rather than economic ones.
The overriding goal of this budget update is to ensure that the accounts for 2012-13 end up in surplus. That is not because the economy requires it – take out mining investment and the rest of the economy is anaemic – but because Labor pledged to deliver a surplus, and the Liberals have used their rhetoric to make it the test of Labor’s ability to manage the economy.
Few economists agree. Australia’s finances are OK, but outside mining, its economy is weak. Non-mining business investment is at the lowest share of GDP for 40 years. More and more shops are empty. Mining export prices have fallen, yet the dollar remains crushingly high. The job market has weakened. Housing appears to be turning, and more mines are ready to produce, but falling prices and weak overseas demand mean they can’t support a fragile economy.
Treasury and the Reserve Bank agree that the economy is weakening. Yesterday they cut their estimate of real growth in 2012-13 from 3.25 per cent to 3 per cent: only a minor change, but the forecast of growth in current prices slumped from 5 per cent to 4 per cent, reflecting those falls in export prices, as well as a weaker economy.
Employment is now forecast to grow just 1 per cent over the year: 10,000 jobs a month, only half the growth in people defined as ”working age”. Forecast growth in wages and consumer prices is down marginally, forecast growth in business investment down sharply. In short, the economy is forecast to keep muddling along, with mining investment growing rapidly and the rest marking time. That’s probably a reasonable call – if the world economy gets no worse.
Three points stand out. First, that is not a sensible environment in which to take $44 billion or 3.1 per cent of GDP out of the economy. The budget cuts haven’t had a big impact yet, but if they are real, they will – adding to the contractionary pressures from cash-strapped business, cautious consumers and underfunded state governments.
Second, not all those cuts are real. If there is a surplus in 2012-13, it will be because a host of fiddles over the past year shifted $9 billion of spending from 2012-13 into 2011-12. On one hand, that means the real contractionary impact is more like $26 billion or 1.7 per cent of GDP. On the other, it means a fiddle-free bottom line would be not a $1 billion surplus, but an $8 billion deficit.
Third, those fiddles apply only to 2012-13. That explains why the biggest new measure yesterday will take effect in 2013-14. For no good reason, companies will face the added expense of making their tax payments monthly, rather than quarterly. They will not pay more tax, but in 2013-14, big business will have to pay tax on 14 months’ earnings, with medium businesses suffering a similar fate over the following two years.
I warned months ago that Labor’s pledge to slash its way to budget surplus in 2012-13 would force it into more and more bad policy decisions to keep ahead of a slowing economy. In May it scrapped its plan to cut company tax. Now, in effect, it has ordered a one-off increase in company tax to keep the budget in surplus in 2013-14. Both make Australian business less competitive at a time when we need to make it more so.
The same is true for many of yesterday’s announced savings – and probably for the $3 billion of unexplained savings on page 56. It’s fine for a government hiring more tax auditors to cut tax avoidance, which is the second biggest saving ($2.1 billion over four years). But some of its savings are bad policy born of fiscal desperation: cutting skills training and investment in research spending and higher education, hiking visa fees, cutting support for new exporters. How do they help to develop the future Australia?
They only intensify the real problem facing Australia: our overvalued currency. The International Monetary Fund’s database shows Australia now has the third most overvalued currency in the world, when you compare prices in each country. The high dollar has raised our incomes, but also our prices. It is great if you earn money in Australia and spend it overseas (as increasingly, we are). It is awful if you run a business that makes things here to sell to the world.
A decade ago, we had a low dollar that meant goods and services in Australia were produced at 77 per cent of the cost of those in the US. Now we have a high dollar that means it costs $US161 to produce here what you could produce for $100 in the US, for $67 in China, and for $41 in India.
That, not the deficit, is the real problem. We ignore it at our peril.
For some years now we’ve been saying that the budget came with a “Made in China” stamp. So all it took was for China to slow more than Treasury had assumed and that was enough to strip billions off the bottom line.
As it did in May’s budget, the government has filled that hole by raising taxes by more than the required amount, and then using the extra it raised to increase spending as well. Yes, you read that last bit right. Yesterday’s decisions actually increased spending rather than cutting it, as was also done at budget time.
In fact tax and spend is getting to be a bit of a trend, a disappointing one. But there were some differences this time around. First, Treasury estimated that the hit to the budget from China’s slowdown was actually pretty small, weighing in at “just” $2 billion this year, and $11 billion over four years. Given that the budget will chew through something like $1600 billion in total over those four years, that’s a loss to the budget of less than 1 per cent.
If those figures sound like half the size of the ones being mentioned over the weekend, that is because they are. Treasury estimated revenues will fall more than $3 billion this year, rising to a total shortfall of $20 billion in the four years to 2015-16. But it also nominated lower spending due to economic effects, leaving the overall hit to the budget from recent economic developments as an $11 billion hole to backfill.
Or, to be more exact, that’s the current estimate. Although Deloitte’s forecasts for the economy are very similar to those announced yesterday, and indeed the same is true for many taxes, my fear is that the Treasury has underestimated the size of the hole in the budget caused by China’s recent slowdown.
Perhaps most notably, Treasury revised down its resource rent collections – the new mining tax, plus the petroleum resource rent tax – by less than $2 billion in 2012-13.
I have a bad feeling about that. Commodity prices have had a hissy fit since the budget was brought down. And the usual automatic stabilising role of the Australian dollar hasn’t happened yet, meaning that the revenues of the miners, denominated in $A, have taken something of a bath in recent months. In addition the premiers are continuing to pick off MRRT revenues from the outside, while capex costs (a deduction to the new tax) continue to rise relatively rapidly.
Those factors all point to lower revenues and higher costs for miners than expected at budget time. Add all that together, and my modelling suggests you don’t get much by way of MRRT collections this year.
That’s no surprise – if China sneezes, the new mining tax was always going to get pneumonia.
But it is a good example of the risk that yesterday’s mini-budget may still fall shy of guaranteeing a surplus this financial year.
On my figuring, it won’t: we’re still in deficit – though that matters much more to the politicians than to the economists.
Then again, by the time you read this the first payment of the new mining tax will be sitting in the ATO’s accounts. It may suggest that I’m wrong – that the MRRT will indeed raise something closer to what Treasury suggests.
Or maybe it won’t. I’m surprised the mini-budget was released yesterday, as that means the government missed the chance for a much better estimate of the new mining tax. It may rue that.
Then there is the question of how the government filled its $11 billion hole. The answer is that it raised taxes (up $13 billion over four years), partly offset by also spending more (up $2 billion over four years).
It isn’t clear that spending more overall is sensible, even if some individual decisions (baby bonus, private health insurance) were.
The bottom line? I’m worried that the tax take is sicker than the new official forecasts show. And although the key tax increase was politically smart (company tax rates didn’t go up but their timing was brought forward), it wasn’t exactly a triumph of economic reform. We deserve better than that.
Millions of dollars worth of lost superannuation is set to be transferred to the taxman, under a move the government says will save members from paying unnecessary fees.
In a measure announced yesterday, the government will collect an extra $675 million by lowering the threshold at which lost superannuation accounts are automatically moved to the Australian Tax Office.
At present, super accounts of people who cannot be contacted are transferred to the Tax Office if they hold less than $200 and there have been no contributions for five years.
But from January, lost super accounts will be transferred to the ATO if the account’s owner cannot be contacted, there is less than $2000 in the fund, and there have been no contributions for one year or more.
With the nation’s lost super accounts holding about $17 billion, the change will deliver to the budget $675 million in savings over the next four years.
The unclaimed money will be held in trust by the government, and will deliver a boost to budget coffers unless it is reclaimed its owner.
Members can reclaim their lost funds from the Tax Office, which will pay interest equivalent to inflation on their unclaimed super.
A spokesman for the Superannuation Minister, Bill Shorten, said the changes would mean people did not pay unnecessary fees on lost super.
The opposition’s spokesman on superannuation, Mathias Cormann, accused the government of using lost super to prop up the budget.
Deanne Stewart, the general manager of superannuation at BT Financial Group, said it was a positive outcome for members with small accounts.
“If someone left $200 in an ATM machine, they would drop everything and rush back to get it. Every day, Australians lose $3.8 million of superannuation. We want to help them find it,” Ms Stewart said.
The chief executive of the Association of Financial Advisers, Richard Klipin, said the changes were likely to benefit some members, but others stood to unwittingly lose insurance purchased through super.
The private health insurance subsidies introduced by the Howard government will be dismantled further by a Labor decision to reduce the rebate over time and increase charges for people who wait for their 30s to take out health insurance.
From 2014, the means-tested tax rebate for private health insurance premiums will be indexed to the consumer price index, cutting the link between the subsidy and the price paid by members.
Capping the rebate will save the government $699.7 million. Another $398.7 million will come from removing the rebate paid on the extra charge faced by those who don’t take up private health insurance until after their 31st birthday.
The Howard government introduced the tax rebate and the lifetime health cover loading after take-up of hospital treatment policies slumped to 30 per cent of the population about 12 years ago.
About 46.8 per cent of the population now has hospital cover but some insurers fear the latest measures, coupled with the means-testing of the rebate that came in this year, will be too much for some, particularly those on low incomes.
Industry lobby group Private Healthcare Australia said the gap between health inflation and the CPI meant it was likely consumers would be paying more for their private healthcare in years to come.
NIB chief executive Mark Fitzgibbon hopes freezing the government allocation in real terms marks the beginning of a sea change.
“These changes are one-third of a good policy,” Mr Fitzgibbon said. He wants competition to determine pricing and to increase insurers’ power to control claims’ inflation.
Regulation of pricing is found in many nooks and crannies of private health; for example, the price insurers pay hospitals for prosthetics.
Removing such controls would give insurers a better chance of bringing premium increases in line with the CPI, Mr Fitzgibbon said.
Many insurers want the end of risk equalisation, where any benefit from encouraging their members to be healthier is shared by all funds.
The government has already said it will streamline the process for approving premium increases, which starts next month. In the past, the health minister of the day has rejected rises that have passed the scrutiny of the industry regulator.
“This year we hope the process will more actuarial than political,” Mr Fitzgibbon said.
Tying the rebate to the CPI will mean that if premiums rise an average of 5.1 per cent – as they have done this year – the cost for a typical member will have risen 6.7 per cent, Deutsche Bank says. The rebate removal for lifetime loading will affect about 1 million members.
The government-owned Medibank Private was hoping “for a range of other reforms” to ensure indexing the rebate does not have an adverse impact on the overall cost of health insurance, a spokeswoman said.
BUPA is concerned about the use of the CPI as an indexing measure as it does not reflect the full cost of annual health inflation.
This year the government began to means-test the 30 per cent private health insurance rebate.
Lost superannuation accounts with balances of $2000 and less will be transferred to the Tax Office and held in trust until they are claimed, the Government will announce in today’s mid-year Budget update.
The measure will protect lost retirement savings from unnecessary fees charged by super funds, while also boosting returns for all super savers by reducing the cost to funds of administering these small “lost” accounts.
It will also generate extra revenue for the Government as it seeks to balance its books.
A Treasury analysis found lost super accounts with balances as low as $1000 were being slugged with average insurance charges of $169 a year, meaning they would disappear after six years.
The Tax Office already manages lost super accounts with less than $200. This threshold will increase to $2000 and, for the first time, the Government will start paying interest on the accounts at the rate of inflation.
“The introduction of interest means that not only will these small lost accounts no longer be eaten up by fees and charges, but they’ll actually retain their value in real terms until they’re reunited with the lost member,” Mr Shorten said.
“There are 3.4 billion lost super accounts in Australia with a combined balance of $17.7 billion.”
There would also be a benefit for all super savers because, presently, the cost to super funds of having to administer these small lost accounts reduced overall returns by 0.1 per cent a year on average.
Eliminating this cost would boost the retirement balance of a 30-year-old worker on average full-time earnings by about $10,600.
Consumer group Choice chairwoman Jenni Mack said the move to protect lost super was an “extremely good step forward” on what had been an “intractable problem” since the introduction of compulsory superannuation two decades ago.
“Fees have been exceeding earnings on these lost accounts and they have been going backwards at an increasingly fast rate. This new policy means you’re going to get no fees and you’re going to get interest.
“It’s really good for people who lose track of their superannuation and they are typically young people, part time and casual workers and disproportionately they are women. This means that when they do aggregate their accounts there’s going to be something of meaning there.”
The Government expects to earn some extra revenue from the measure which will be included as a saving in the mid-year Budget update, to be released today.
This is because once balances are transferred, the government will be able to generate a return in excess of the interest it will pay.
But Ms Mack said this was reasonable and still a big improvement for savers on losing money as they presently did.
“If the Government is managing this money that’s probably a reasonable rate of return over the long term because there are costs generated in doing this. Vulnerable consumers are going to be better off.”
When we see the mid-year budget review today, all eyes will be on the savings Wayne Swan will announce to ensure he still achieves a surplus this financial year. The measures will be needed because the weakness in tax collections is even greater than expected.
Deciding how much we should cut spending is one thing, but working out what to do about the budget’s structural problems on the revenue side is quite another.
One way the Gillard government is seeking to reduce pressure on its budget is by demanding bigger contributions to joint projects by the states. They, however, always see themselves as recipients of federal spending, not contributors.
I have a fair bit of sympathy for the states. They have primary responsibility for the big-ticket spending areas of education, hospitals, law and order, roads and transport, and much else, but their revenue-raising power is limited, having been progressively whittled away by the High Court.
That’s why John Howard bequeathed them all the proceeds from the goods and services tax. But the GST is no longer the growth tax it seemed to be. Consumer spending will never again grow as strongly as it did during the tax’s first seven years, and an ever-growing proportion of consumer spending goes on items excluded from the GST base.
Because the revenue-raising capacity of the two levels of government is so unequal, any serious funding problem for the states ends up being the federal government’s problem.
But it’s harder to feel sorry for the states when you remember – as prompted by the secretary to the Treasury, Martin Parkinson, in a recent speech – the way they have knowingly and over many years perverted one perfectly good tax in their possession, payroll tax.
The states’ limited taxing ability is an old problem. As long ago as the early 1970s, Billy McMahon sought to fix it for good and all by giving them the federal payroll tax.
Clearly, it didn’t work. For a while the states raised the rates of their payroll taxes, but soon enough they began cutting rates to curry favour with business before election campaigns and eroding the base, thereby turning it from a reasonably neutral tax into one that distorts business choices.
Advocates of a federal system like the idea it allows a degree of competition between the states. But when the states compete to lower tax rates – or use offers of tax holidays to attract investment projects away from other states – they all lose. Business plays them off a break. The standard argument against payroll tax is that, by raising the cost of labour, it discourages employment. But this is ill-considered.
In the end, you can tax only three things: land, labour or capital. Income tax is largely a tax on labour; tax economists say company tax is largely a tax on labour, the GST is largely a tax on labour (most consumer spending is done from wages) and payroll tax is also a tax on labour.
Business people tend to approve of the GST – they’re always saying its rate should be increased – but invariably oppose payroll tax, even though, in principle, the two are quite similar. Business people know the burden of GST is passed on to consumers, but many seem to imagine the burden of payroll tax remains with them. In both cases, who writes the cheque that goes to the tax man doesn’t tell you who ultimately bears the tax.
Business people lap up the fashionable idea that, in a globalising world of ever-greater mobility between economies, we should be relying more on taxing land and labour, and less on taxing capital. But all the while they’re inveigling the premiers into reducing payroll tax.
When Parkinson spoke in defence of payroll tax (merely echoing the opinion of all treasuries, federal or state), the states responded that the tax was bad for small business. This is pretty much the opposite of the truth.
Apart from cutting the rate at which the tax is applied, the main way the states have undermined this – the biggest of their own taxes – is by regularly raising the threshold at which the tax applies to a business’s wages bill.
So high is the threshold in the various states that genuine small business doesn’t pay the tax. It’s actually a tax on big business. It’s really medium-size business that’s most affected by where the threshold is.
Although payroll tax is an efficient, non-distorting tax in principle, its way-high threshold makes it distorting in practice. It’s a tax that favours small business and penalises big business.
The obvious reform, which would gradually reduce the distortion of business choices and aid the states’ revenue problem without involving too much political pain, is simply to leave the threshold where it is in nominal terms, allowing wage inflation to progressively lower it in real terms.
The insouciance which has allowed the premiers to fritter away their strongest and soundest source of ”own-revenue” makes you suspect they’re privately perfectly happy with the ”vertical fiscal imbalance” whereby the federal government gets most of the opprobrium for collecting taxes, while the states are perpetual beggars at the federal table, only ever prepared to co-operate with federal reforms if they receive a big enough bribe.
The feds are unlikely to seriously consider changes to the GST until the premiers have shown a willingness to undertake the revenue-enhancing reforms that lie within their own control.
Rather than a liberal dose of budget honesty in the Mid-Year Economic and Fiscal Outlook (MYEFO), we should brace for another cynical political display.
Today’s release of the budget review has a real whiff about it, considering it has only happened twice before in October this century and both before November polls.
The only plausible explanation for going so early, given there is little prospect of a 2012 election, is to beat a raft of additional bad economic data in late October that would reveal the extent of required revenue write-downs against previous inflated estimates.
By firing the MYEFO gun now, the government could conveniently avoid having to report the full size of the hole in mining tax revenue. It has $3 billion booked for this year and $13.4 billion over the forward estimates, money it has spent already. The first payments, or lack thereof, may not have been through by the time MYEFO was printed.
But you need more than cute timing to try to manufacture a wafer-thin surplus of $1.5 billion, or just 0.1 per cent of gross domestic product. It would take a rare talent, given the cumulative $173 billion in the four record deficits Labor has actually delivered – recession-size deficits, despite a growing economy and mining boom.
MYEFO will no doubt contain more money shuffles and dodgy accounting tricks on top of the $8 billion-plus in spending shifts already exposed to bolster the 2012-13 bottom line artificially: things such as inexplicably prepaying $1.1 billion in grants for local governments in 2011-12 and bringing forward the School Kids bonus payment from July to June.
There are also the cash raids on entities such as Medibank Private ($850 million over three years) and even reports of strong-arm tactics against the Reserve Bank of Australia to force a $500 million “dividend” from last year’s profits. Anything that isn’t nailed down is fair game.
We can expect unprincipled changes in long-standing accounting treatments to remove expenditure. Dropping the costs associated with the Future Fund is near certain, which alone would lift the bottom line by $2 billion over four years. There is also $5.8 billion worth of debt for the loss-making national broadband network that is being kept “off budget”.
New alcohol and tobacco taxes are also tipped, as well as hits on superannuation, while 280 grants programs, including for research, have been frozen, wreaking havoc on budgeting in universities and community organisations.
The Gillard government is a past master at inflating forecasts only to later declare they’ve been hit by “unexpected write-downs”, and factoring some write-downs in say, terms of trade and the mining tax or corporate taxes, knowing full well that the actual write-downs will be much greater.
Look at the $43.7 billion deficit confirmed in the final budget outcome for 2011-12, almost double the $22.6 billion predicted in the actual budget 16 months prior.
While we were told before the 2010 election that net debt would peak at $94.4 billion, today it is $147 billion, a mere $52 billion blowout. We need to bear this in mind when the “world’s greatest Treasurer” spruiks his mystical surplus.
Labor’s overreliance on debt is such that leading global bond investor PIMCO found that Commonwealth government bonds were Australia’s second biggest export in 2011-12, surpassing coal. PIMCO contends this “capital tidal wave” has contributed to the high dollar without providing the same economic benefits as other big exports – to the detriment of manufacturers, tourism operators and education providers.
In gross terms for the first time in Australia’s history, the federal government owes more than $259 billion. You never hear the Treasurer talk about that, given he inherited $70 billion in net assets.
The Gillard government is spending $100 billion more a year, about 35 per cent more compared with the last year of the Howard government. This is laughable when you hear Swan and Finance Minister Penny Wong boast about their supposed “savings” record when their spending has outstripped revenue by $173 billion since 2007.
In Wong’s self-congratulatory post-budget “savings” press release, $10.4 billion worth were revenue measures – new or increased taxes.
In MYEFO there needs to be some honesty about how vulnerable the economy is to heavier falls in the terms of trade than predicted, which would cost the budget billions. The budget factored in a fall of 5.75 per cent, yet most economists are predicting much greater falls off the back of big drops we have seen in key commodity prices since the budget, with iron ore and coal down about 45 per cent from their peak.
There is also the big question of how the government plans to plug its $120 billion black hole in unfunded promises, as exposed by The Australian Financial Review, (“Labor’s $120bn blowout”, August 30) without relying on debt. A full national disability insurance scheme, for example, would cost about $46 billion by 2020, yet the government has so far committed just $1 billion for trials, despite claiming full credit. Asked in Senate estimates to confirm there was no further commitment beyond this, Secretary of Finance David Tune replied: “I do not know what is in the government’s head”. The public is fed up with the government’s endless politicking. If the crisis of confidence pervading the community is to ease, honesty must underpin the budget update.
The International Monetary Fund has denied austerity measures are to blame for the sluggish Irish economy, saying that other factors are keeping growth flat.
Greece, Portugal and Ireland are complaining that the Fund underestimated the economic and social impact of drastic spending cuts and tax hikes in the bailout programs, but a senior IMF official said that was not the problem in Ireland.
The pace of the EU-IMF rescue program “has struck an appropriate balance and continues to do so for the period ahead, enabling Ireland to make steady progress in reducing fiscal imbalances while protecting the still fragile economic recovery,” Ajai Chopra, deputy director in the IMF’s European Department, said in a statement.
“With overburdened bank, household and SME (small and medium sized business) balance sheets, and weak growth in trading partners, a number of factors besides fiscal consolidation have been a drag on growth in Ireland,” he said.
The IMF recently admitted that it had underestimated in Greece how deep the “fiscal consolidation,” or austerity measures, in its bailout plan would force the economy into recession.
Critics say the severity of the measures are to blame for Greece’s inability to get back to growth.
At issue was a revision of its “fiscal multiplier,” which IMF economists use to estimate the impact of various actions, like spending cuts, on the economy.
The admission that the IMF got it wrong in Greece has been taken up by other countries undergoing IMF-European Union bailouts, with countries arguing for easier adjustment terms to cope with slower-than-expected growth.
Ireland sought an 85-billion-euro ($108.01 billion) EU-IMF rescue package in November 2010 after it was devastated by the 2008-2009 global financial crisis.
As part of the rescue, Ireland agreed to painful austerity measures including spending cutbacks, state asset sales and tax hikes.
But growth has not returned as soon as hoped – last month the IMF forecast the Irish economy would expand a bare 0.4 per cent this year, if growth picks up in the second half as expected.
Since the IMF reassessed its multiplier, Irish officials have called for less austere reform requirements to encourage faster growth.
But Chopra argued that “in the current discussion of the impact of fiscal adjustment on growth, it is important to note that no single fiscal multiplier is applicable to all countries and circumstances”.
“And although there is uncertainty around any estimate of multipliers, there is no compelling evidence that a higher multiplier was at work in Ireland than the one assumed under the program.”
The IMF has been fighting pressure to ease austere reform terms in all the countries undergoing bailouts since the review of the multiplier.
On Thursday, IMF’s Portugal mission chief Abebe Aemro Selassie told Lisbon that there is no way around a new, strong budget squeeze to reduce debt and return to capital markets.
In the face of public anger over tax increases, Selassie said it was “imperative” to press on with further measures.
“Debt remains high, and to ensure full recovery, the country needs to contain it,” he warned.
“Portugal also needs to ensure that it can finance itself again at reasonable rates. This means that fiscal adjustment is imperative and needs to continue.”
Martin Wolf has not got every call right in the global financial crisis, but it’s hard to think of a significant one he’s got wrong. In an uncertain world, he is now probably the most trusted commentator on the global economy.
When Europe’s leaders decided their top priority should be to cut deficits, he warned this would condemn the European Union to a long recession, making deficits bigger, not smaller. Each time leaders declared they had found the solution to its problems, he shredded their PR bluff with relentless logic.
If governments, banks and companies all pursued contractionary policies at once, he asked, where would the growth come from?
Unless someone bought more goods and services, there could be no growth. Unless someone borrowed, there was no benefit in saving. The common euro currency meant countries could not devalue as a short cut to raising competitiveness. And while one country in trouble could adopt austerity as the way out, a continent could not.
Wolf’s critique was resisted by the Bundesbank, the European Central Bank, the British government and the bureaucrats in Brussels. But time proved him right. Years that should have been used to get Europe out of trouble instead have dug it deeper into it.
He says it is still not clear what the final outcome will be. ”Europe’s choice is between staying in a very bad marriage or embarking on an utterly horrible divorce,” he quips. ”On the optimistic view, we will come out of this, in five or 10 years. But it is quite possible that it will end up destroying the European Union project.”
Martin Wolf lives in London and is chief economics commentator for the Financial Times. But this week he was in Melbourne to give the Corden lecture at Melbourne University in honour of his old teacher and friend, Professor Emeritus Max Corden, now 85, and still influential in economic debate.
Professor Corden, the intellectual driving force behind Australia’s decision to abandon high protection, taught him at Oxford in 1969-70. Wolf was then a child of Jewish refugees, a left-of-centre idealist who joined Britain’s Labour Party, then went to work for the World Bank.
Since then his intellectual journey has taken him from the Labour left to the Thatcherite right, and back to the centre. Now at 66, his political independence is one of his strengths, along with relentless logic, an imposing grip on the data – and a habit of getting it right.
Pimco’s chief executive, Mohamed El-Erian, summed him up as ”by far the most influential economic columnist out there”; many on the economics A-list have said much the same. He knows most of them, some very well: but when he is writing his column, friendships are cast off and only the issue matters.
Corden’s writing style is gently persuasive; Wolf’s sweeps you along, in an insistent, even flamboyant, way. He writes for the intellectual elite. He does not suffer fools gladly.
He flew here from the annual meetings of the World Bank and International Monetary Fund Committee in Tokyo, where Singapore’s Finance Minister, Tharman Shanmugaratnam, closed with the upbeat declaration: ”IMFC members all agreed that we are in a better position today than six months ago.”
It seems a good place to start our conversation. Is that true? Are we further from the cliff now, or edging closer to it? Wolf considers a moment, then says both are right.
”The economic situation is clearly not better than it was six months ago – in fact it’s worse. But the economic policysituation is better. I think the ECB gets it now, and certainly Mario Draghi [the ECB president] gets it.”
The IMF, he points out, has just downgraded its growth forecasts for the second time in six months, especially for the eurozone.
”There are some very large risks out there, particularly the US ‘fiscal cliff’ and the stresses in the eurozone; Spain and, to a lesser degree, Italy. There is austerity fatigue, very high unemployment, continuing economic decline, real threats to political stability.”
But he also points to the EU’s path-breaking decision to set up the European Stability Mechanism to bail out governments and banks and commit to a banking union. ”Most important, the ECB under Mario Draghi has shown a new flexibility and a willingness to intervene to make the eurozone work and survive.”
That is exemplified, he says, by its decision to buy government bonds, which will cut their interest rates and strengthen public finances and banks’ balance sheets. What makes it ”most extraordinary”, he says, is that on the ECB council, only the Bundesbank president, Jens Weidmann, opposed it. Until now the Bundesbank has been driving European policy. Now it’s isolated as hardline allies and the German Chancellor, Angela Merkel, embrace it.
But he is still wary about what happens next, warning there is no consensus on other key issues. While he thinks the US may now be entering a recovery, and Britain may follow by 2015, he expects another five long and painful years before Europe is out of the woods.
”There remain substantial disagreements about the nature of the crisis and the remedies,” he says. ”The creditor nations don’t want to pay; the debtor nations don’t want to adjust too much. The creditor nations think all adjustment should be by the debtors; the debtor nations think – rightly, in my view – that adjustment has to be symmetrical.
”But the important thing is that the German political system is run by people who are strongly pro-Europe and pro-euro. They have shown a willingness to do whatever is necessary, even if it tends to be too little, too late. They are constantly on the back foot, but they manage to keep the ball out of their stumps.”
Spain and Italy, not Greece, are the biggest risks to the eurozone, he says. ”You can imagine the eurozone surviving without Greece, but Spain and Italy are central parts of it. Their survival is an issue of a different order of magnitude.”
Will Spain seek a bailout for its banks? Yes, he says, but it might take until Christmas to get a deal.
The ECB will want the IMF to police it, which raises political sensitivities. The Germans want to sort out the Greek bailout before embarking on another, and the Greek Prime Minister, Antonis Samaras, wants an extra two years to meet Greece’s budget deadlines.
Greece, he says, needs less fiscal austerity but more structural reform and ”massive debt relief”. Even after the recent write-off, Greece’s debt remains ”utterly unviable”.
”Everybody knows they’ve got to write down the debt again. There won’t be private investment in Greece until they do. Greece’s problems are essentially those of developing countries. Portugal and Greece are not really developed countries. At current wage levels, they are very uncompetitive – but a huge debt restructuring would help.”
Should Greece leave the eurozone? Yes, he says, but if it does so now it would start a run on Spain and Portugal. It should delay until 2015, when the crisis has calmed.
We jump to Ireland. Wolf says the ECB should use its new stability mechanism to relieve Irish taxpayers of their banks’ huge debts. ”Those debts should be written off. We should not do any more programs that are not likely to work.”
We cross to the US to look over the edge of its ”fiscal cliff”: automatic spending cuts due to take effect next year, which will slash 4 per cent of gross domestic product from government spending, unless both sides agree on a deficit reduction plan. If they can’t, ”they’ll have a deep recession”.
”It’s crazy. Every legislator knows this. Reaching a deal will be very difficult, because neither side wants to give up.
”If [Mitt] Romney is elected president, it will be easier to reach a deal. The Republicans won’t want to start their term with a fiscal disaster. They will want a deal. If [Barack] Obama wins, the Republicans will be outraged. They will make it very difficult, and the best we can hope for is that everything is just pushed forward: they extend the Bush tax cuts, they postpone the sequestration.
”That seems to me the least unlikely outcome. In the end, the US does not go over cliffs.”
The one issue on which Wolf is optimistic is a US recovery. ”The housing cycle has turned. The household sector has deleveraged significantly, financial sector balance sheets have shrunk and the banks are vastly better capitalised. Unless they go off the fiscal cliff, we are going to a see a recovery in the US. In the UK, it’s probably two or three years away.”
While the recovery will cut the deficit, Wolf sees no sign that Romney will. ”Romney is for monstrously large tax cuts – keeping the Bush tax cuts, and reducing the top marginal rate to 25 per cent. I suspect the idea of offsetting reductions to tax breaks won’t happen. The net effect will be a really large tax cut: trillions [of dollars] over a decade.” Can’t they close the gap by spending cuts? No. ”They’ve said they really can’t cut social security and Medicare, and he wants to increase defence spending. Interest payments are untouchable. So three-quarters of the federal budget is untouchable.
We end up in Australia. He mocks himself as a ”one-day expert”, but he’s been here before and knows where we fit in. ”Australia is a prosperous country that happens to sit on enormous resources, which the Chinese want. And so [its future] is a derived play on Chinese and other emerging country growth.
”The extraordinary hyper-boom in commodity demand we’ve seen in the past 10 years will not be repeated.
”Public finances in Australia are strong. But growth in Australia will slow, foreign finance might slow, and choices get a bit tougher, without being really tough. It will still be the lucky country, but it may be a little less lucky.”
What we heard in the second presidential debate was President Obama and Mitt Romney not discussing the nation’s future. Almost every expert agrees that controlling health costs is the crux of curing chronic budget deficits. Health spending already exceeds a quarter of federal outlays. With Obamacare’s coverage of the uninsured starting in 2014 and retiring baby boomers flooding into Medicare, the share is headed toward a third. Neither Obama nor Romney uttered a word about how to tame health spending.
And then there’s the “fiscal cliff” – the roughly $US600 billion of spending cuts and tax increases scheduled for early 2013 that, if allowed to take effect, would almost certainly plunge the economy back into recession. Not a peep from either on how to avoid the cliff: which tax increases or spending cuts should be postponed, why and for how long; and how to win congressional support from the other party.
Obama said that Romney’s budget math didn’t add up and that he had proposed spending cuts for only two programs, Big Bird (presumably public broadcasting) and Planned Parenthood. True. Romney promises to balance the budget, raise defense spending and cut taxes for some unidentified part of the middle class. All of this can’t be done without massive as-yet-unspecified – and probably politically impossible – spending cuts.
But wait. The two programs that Romney offered for cuts were actually two more than Obama suggested. And Obama’s budget never balances.
The administration’s latest projections foresee $US6.4 trillion worth of deficits between 2013 and 2022; in 2022, the expected deficit is $US652 billion, 2.6 per cent of the economy (gross domestic product). Even these forecasts rest on fairly optimistic economic assumptions. From 2014 to 2017, GDP is projected to grow about 4 per cent a year, roughly double the current rate of expansion. The forecast assumes no recession between now and 2022.
Romney did mention, almost in passing, that he would reform Social Security and Medicare. Changes could yield huge savings, because these programs cost $US1.2 trillion in fiscal 2012, a third of all federal spending. But Romney didn’t specify how he would alter Social Security, and his controversial Medicare proposal wouldn’t start until 2022 – after a two-term President Romney would already have left office.
Still, Obama didn’t even mention these programs. The president has been content to imply that raising taxes on the “rich,” defined as couples with incomes exceeding $US250,000, would cure most of the deficit problem. That’s not true.
Obama and Romney can evade these unpleasant and unpopular subjects now, but the victor won’t be able to avoid them after the election. How the fiscal cliff is handled (or mishandled) almost certainly represents the single most important federal policy affecting the economy’s near-term prospects. Nor will large deficits miraculously vanish even if the recovery continues and strengthens.
Americans face a rude awakening: a future that hasn’t been acknowledged and debated in the campaign.
Government adviser Mark Johnson and the financial services industry have warned that Australia is losing ground against Asian competitors in its plan to build a financial services hub amid slow progress of government policy changes designed to boost the sector.
A report shows Sydney’s global ranking as a financial services centre has fallen six places to 15th in the past five years, at a time when politicians have lauded the strength of the local industry in withstanding ructions in world financial markets.
Mr Johnson, chairman of the Australian Financial Services Task Force, wrote a government-commissioned report in 2009 recommending 19 financial services policy changes. He told The Australian Financial Review he understood the government was under budgetary constraints and was occupied with superannuation changes, but it needed to act quicker on his findings.
“The industry view is that real progress on some key recommendations is yet to be seen; developing the local bond market, the wider investment manager regime, introduction of alternative funds management vehicles, and the removal of the Libor cap on foreign banks borrowing from their parents,” Mr Johnson said.
Stiff competition from Hong Kong, Singapore
The former Macquarie Group deputy chairman said Sydney’s fall in the rankings in the respected Z/Yen global financial centres index – Melbourne was placed 18th – may be partly attributable to formidable competition including from Hong Kong and Singapore, which provide tax incentives, acceptable regulatory frameworks and coherent policies.
“They keep abreast of market developments and move quickly when they see competitive advantage,” Mr Johnson said.
His preparedness to speak out publicly reflects a growing feeling among some financial services professionals that previous momentum for the Johnson report reforms has stalled under the Gillard government.
Sydney’s ranking as a financial centre was 9th in 2007, 10th in 2008, 11th in 2009 and moved between 15th and 16th over the past three years, according to Z/Yen.
The report’s author, Mark Yeandle, said that while Sydney scores well in the insurance, banking and professional services sectors, it did not rate very highly in the “reputational advantage” category, indicating a need for more marketing and promoting the benefits of the city.
The federal government has made some progress. This includes partially adopting tax changes for funds management to help them attract funds from overseas, licensing Chi-X to introduce competition for trading exchanges and negotiating with Asian governments on piloting a regional funds passport, which would lower the regulatory burden to issue products in other jurisdictions.
Government defends progress
A spokesman for Financial Services Minister Bill Shorten said substantial progress had been made on key recommendations of the Johnson report, “such as the investment management regime and kick-starting the Asian passport. The minister is also leading a trade delegation to Myanmar to build further relationships with the region.”
The spokesman also said the government has delivered the first two phases of the key reform to the investment manager regime, “which have created certainty for foreign funds in Australia and exempted foreign funds with Australian operations from income taxes. “Consultation on the final phase of the IMR reforms is under way, following the passage through Parliament of the first two phases.
“As part of the review into the Permanent Establishment attribution rules, the Board of Taxation will also look at the cap that currently exists on the interest rates on certain international interbank loans, which is currently set by the London Interbank Offered Rate including those between an Australian bank and its foreign head office. The Board will report to the Assistant Treasurer by April 2013.”
Mr Johnson acknowledged these milestones.
Brogden calls for swifter moves
Financial Services Council chief executive John Brogden said implementation of the remaining Johnson reforms needed to be accelerated given other parts of the economy are slowing. “They will help attract billions of dollars of additional investments from overseas to be managed domestically at exactly the right time to counter the declining boom in mining investment,” he said.“Through implementation of the Johnson Report recommendations there is a massive potential for Australia to build upon its strength in financial services through investment products and funds management skills.”
The Johnson report said policy changes on tax, regulation and human capital could substantially boost trade in financial services and improve the competitiveness and efficiency of the sector.
It concluded that Australia has arguably the most efficient and competitive full-service financial sector in the Asia-Pacific region, with many of the key requirements for a successful financial centre, including a highly skilled workforce and good regulatory framework.
Yet only 3 per cent of the $1.8 trillion in funds under management are sourced from offshore, versus 31 per cent in the United Kingdom, 64 per cent in Hong Kong and 80 per cent for Singapore. The government has consulted on reducing red tape for corporate bond issuances to retail investors and plans to list government bonds on the ASX.
Attracting offshore investors
It is also considering a Board of Tax report on alternative funds management vehicles that offshore investors are more familiar with, unveiled a paper on removing the Libor cap on foreign banks’ borrowing.
But the process has been painfully slow and the final details have not been released.
Shanghai’s top financial official, Fang Xing-Hai, told the Financial Review last week he was impressed by the Australia-backed plan for a region-wide mutual recognition of investment funds, which is known as the Asia Region Funds Passport.
Mr Johnson said Shanghai’s interest in the Regional Funds Passport was a welcome development.
“It would be a really good thing if China become a participant in the negotiations being led by the Australian Treasury,” he said.
“China’s pool of savings is huge and growing, as are savings across the region.”
“It is a very important policy question whether the UCITS framework from the European Union will house a big chunk of these savings, or whether a regional framework is developed to better suit the economic growth and development objectives of regional economies.”
Questions over tax policy
Mr Brogden said the financial services sector represents 10.6 per cent of Australia’s GDP – bigger than mining and manufacturing.
The local superannuation pot is projected to grow from $1.4 trillion to $3 trillion by 2020 and more than $5 trillion by 2030.
But a surprise doubling of withholding tax to 15 per cent announced in the May federal budget, has sparked complaints from the industry that the government’s recent actions are at odds with its stated ambition of developing Australia as a financial centre.
The chief executive of funds management administrator FundBPO, Martin Smith, said it was crucial there was consistency and stability in tax and regulation to assure international investors.
“Our challenges are we have a lot of inconsistency and complexity,” he said.
Other countries are pushing ahead with reforms to boost their local financial services industries.
In New Zealand, an advisory body called the International Funds Services Development Group has already legislated the equivalent of our semi-progressed Investment Manager Regime
Singapore, Hong Kong and London have similar schemes in place and the Asia countries have made the sectors are key component of their industrial policy.
The Z/Yen ranks London first, New York second, Hong Kong third and Singapore fourth. Other cities ahead of Sydney and Melbourne include Zurich, Seoul, Tokyo, Toronto and Frankfurt.
Super is tax-free once members turn 60 and retire, but it is the potential for large tax-free capital gains that has attracted Treasury’s attention, especially now that self-managed super funds (SMSFs) are allowed to invest in property.
In 2010, Treasury famously referred to SMSFs as the new tax-minimisation vehicle of choice.
While super funds pay capital gains tax at concessional rates on the disposal of assets during the accumulation phase, all income is tax-free in the pension phase, including income from the sale of investments.
The technical director of the SMSF Professionals’ Association of Australia, Peter Burgess, says it has been incorrectly reported that there is an anomaly in the system that allows only SMSFs to shift investments from the accumulation phase to pension phase without paying capital gains tax.
”This is not the case,” he says. ”It applies to all super funds but a lot of large funds use [the shift to pension phase] as a capital gains tax event. The law does not require them to do that but for administration purposes they may choose to do so.”
Beyond the grave
Burgess argues that any move to treat the transfer of assets into a super pension as a disposal for tax purposes would not help the budget position or bring in additional revenue.
”A lot of funds are sitting on large unrealised capital losses as a result of the global financial crisis,” he says. ”Funds could use this to offset capital gains so revenue would be minimal. If they keep changing the rules, it dents confidence in super and people may turn to holding assets outside super, which is not as heavily regulated.”
While capital gains are tax-free while retirees draw a pension, this preferential treatment does not necessarily extend beyond the grave.
In a controversial draft ruling last year, the Australian Taxation Office ruled that when members die, their fund ceases to be a pension and all underlying assets must be sold to fund their death benefit. This means the fund loses its ability to sell investments on a tax-free basis.
Instead, capital gains will be taxed at a rate of 15 per cent if held for less than 12 months and 10 per cent if held for longer.
This can result in a large unexpected tax bill for the member’s beneficiaries where assets have been held for a long time.
The exception to this rule is where the deceased has what is called a reversionary pension. A pension can only be reverted to a spouse and this allows them to continue receiving pension income with the capital gains tax exemption intact.
Confusion about capital gains tax rules and how they are applied when someone dies is widespread. A senior adviser for Donnelly Wealth, Russell Lees, says clients often want to know if the estate will be hit with a capital gains tax bill when assets are sold and, if so, who foots the bill.
When people die, their assets are distributed according to their will. If shares, property or other investments held outside super are sold and the proceeds distributed in cash to their beneficiaries, then normal capital gains tax rules apply. Realised capital gains must be included in the deceased’s final tax return and tax paid at their marginal rate.
The family home remains tax-free provided it is sold within two years.
However, Lees says assets such as shares or property can be transferred into the name of a beneficiary with the original cost base intact, and capital gains tax deferred until they sell the assets.
The one exception is assets purchased before September 1985, whereby the cost base becomes the market value at the time of death.
But things become more complicated if the assets are held inside a super fund, especially when the fund is already in pension phase.
”It pays to have a reversionary pension,” Lees says. Failing that, he says, people should consider selling down assets with large unrealised capital gains while they are alive and their fund is still tax-free.
Not doing so can produce a double blow for a surviving spouses who receive a lump-sum death benefit and want to put it back into a tax-free super pension.
Not only will they be liable for capital gains tax, but if the lump-sum benefit exceeds their annual contribution cap they may have to drip-feed the cash back into super over several years.
Lees says the situation is even worse when a super lump sum is paid to an adult child who must also pay death benefits tax of 15 per cent on the taxable component of the account balance. (Death benefits paid to a surviving spouse or financial dependant are tax-free.)
Burgess says Treasury has been listening to the industry’s concerns about the ATO draft ruling affecting the treatment of capital gains in pension accounts on the death of a member.
”One option Treasury is looking at is considering a fund as a pension until six months after death,” he says. This would give funds time to sell assets supporting the pension death benefits and pay the proceeds out to beneficiaries while they are not subject to capital gains tax.
The final ATO ruling is overdue, which makes Burgess think it’s likely Treasury is planning to adopt the six-month rule.
There is a lot of speculation about how the federal government can increase tax revenue to keep its promise of a balanced budget. Two areas mentioned regularly as targets are the negative gearing of rental properties and, the biggest cash cow of all, superannuation.
The banning of negative gearing is often done on the basis of social and tax equity.
Among the crimes that negative gearing is accused of are a lack of affordable rental accommodation, massive increases in house prices and billions of dollars in tax revenue forsaken.
For some reason, critics of negative gearing don’t believe it is right that investors can claim interest on loans used to fund investment purchases. There is nothing special in the tax legislation that allows interest on investment loans to be tax deductible.
One of the major principles of Australian taxation is costs necessarily incurred in earning income are tax deductible. Where a loan is required to buy an income-producing asset, whether it is a rental property or machinery, the interest on the loan is tax deductible.
If the interest cost, combined with the other costs associated with the investment, produces a loss, the investment is classed as being negatively geared.
This ability to claim interest as a tax deduction is not peculiar to Australia and is a basic tenet of many tax systems, including those in Britain, Canada and the US.
It is not a coincidence that the last time the banning of tax benefits from negative gearing was considered here was under a Labor government. In July 1985, the Hawke/Keating government removed the tax benefits from negative gearing of rental properties.
This was done by limiting the tax deduction for interest up to the value of the income produced from a property. Any excess interest that produced a loss was carried forward and added to the property’s purchase cost.
The decision to implement this ban made it a big candidate for the winner of ”it seemed like a good idea at the time” awards. Banning tax deductions for negative gearing losses, coupled with the introduction of capital gains tax in September 1985, resulted in a shortage of rental accommodation and led to an increase in rents.
The decision was eventually reversed by the Hawke/Keating government only two years later. Not only had the stock of rental properties dried up, but the building industry was in big decline and further action had to be taken.
In addition to reinstating the tax deduction for negative gearing losses, the government introduced a tax deduction for the cost of building income-producing property.
Initially the deduction applied only to business income-producing properties, but when this proved insufficient to revive the building industry, the building cost write-off was extended to residential income-producing properties.
It is not a coincidence that the tax benefits associated with the negative gearing of rental properties are once again a target under a Labor government.
It is also interesting to note that there are many signs, as was the case in the 1980s, that the building industry is entering a decline.
It can be only hoped that the government remembers that ”those who cannot learn from history are doomed to repeat it”. This will mean looking for other ways to increase tax revenue that won’t have the same long-term adverse effects.
Hopefully, this will not mean superannuation benefits will yet again be reduced by taxes imposed under a Labor government.
Now that so many commentators are suggesting ways to restrict the superannuation concessions that attract those who choose to save for their retirement through do-it-yourself super, it’s hard to imagine the generosity of some past concessions.
A decade ago, for instance, super savers were being offered initially a full exemption and then a 50 per cent exemption from the government age pension assets test if they took their savings as a super income stream with no entitlement to lump sum withdrawals.
The government was trying to encourage people to take their super as an income stream.
The income streams linked to this offer were lifetime defined benefit pensions and life expectancy pensions and they attracted many thousands of retirees prepared to trade lump sum super flexibility for extra income.
Now as anyone with super who also qualifies for the government age pensions knows, it’s the assets test that mainly reduces any government pension entitlement.
Every $1000 of assets greater than a test-free amount, which for a home-owning couple is $273,000, reduces any fortnightly government pension entitlement by $1.50.
But as many DIY funds that pursued this strategy discovered during the global financial crisis, lifetime pensions can get into trouble with another requirement they must meet.
Life pensions run from DIY funds, for instance, must also satisfy an annual solvency test that requires an actuary to declare a high probability the fund will be able to keep paying the required income for the expected life of the retiree.
Where a fund fails this test, which many did after investment values tumbled in the GFC, members not only lost their asset test concession they were also threatened with a clawback of five years worth of government pension payments.
But after the extent of the problems for retirees was highlighted during the troubled post-GFC period, the government allowed DIY funds relief from the clawback if they converted their defined benefit pension to a more flexible market-linked pension. Although it was an improvement, lump sum withdrawals were still restricted and those drawing the pension lost their assets test concession.
Market-linked pensions, also described as term-allocated pensions, are a type of super term pension where the income withdrawal requirement is calculated based on the annual pension account balance, much like today’s most common super income stream, account-based pensions.
Instead of the required minimum income being a percentage of the account balance based on your age – with no maximum limit – the proportion of the annual account balance of a market-linked pension that must be taken as income is based on pension payment factors linked to a chosen life expectancy of the pensioner.
One problem associated with this relief concession was uncertainty about the treatment of one aspect of lifetime pensions – any special reserve account established within the fund to meet pension obligations in case a retiree lived longer than expected.
For at least three years now, says actuary Brian Bendzulla of NetActuary, there have been two views in the super fraternity about the treatment of life pension reserves.
One is drawn from super regulations and suggests if reserve amounts are distributed to members they should be classified as tax concessional contributions that must meet contribution limits. If they happen to exceed these limits they face penalty tax.
This led to suggestions that such reserves were better off being trickled out to fund members in amounts that didn’t exceed contribution limits.
Another view, which some super specialists believed was implied in regulations, was that if a reserve balance was used at the same time as the primary conversion to immediately start another pension for the same member, the choice could be an account-based pension with lump sum withdrawal entitlements.
This uncertainty, says Bendzulla, has been clarified by a somewhat belated Australian Taxation Office interpretive decision issued a week ago that unfortunately rules out any suggestion a reserve can be used to set up an account-based pension.
The interpretive decision answered the specific question of whether a DIY fund with a $1.65 million lifetime pension, of which $450,000 was in a pension reserve account, had made a tax concessional contribution by contributing the $450,000 to an account-based pension. The taxman responded that he believed it had.
Bendzulla says while this won’t be good news for anyone who has gone down the account-based pension route for their reserve balance given the possible excess penalty tax liability, there is nevertheless a positive twist in the decision.
This twist is that the entire value of the lifetime pension account and the pension reserve account could – on the commutation of a lifetime pension – be used to commence a market-linked pension for the relevant member. So the pension balance and the reserve amount could be combined without the reserve being counted as a tax concessional contribution.
It’s an important development for DIY funds that still have lifetime pensions, says Bendzulla.
This conclusion stems from an ATO view expressed in the decision that the money in the lifetime pension account and the pension reserve account together represent a reserve to guarantee the complying lifetime pension payments for the term of the complying pension.
One of Australia’s biggest investment banks has called for strict new high-frequency trading rules, including fees for some computerised orders, in a bid to make predatory trading unprofitable.
UBS says HFT remains an important part of modern markets but it will lobby the corporate regulator to make traders abide by new rules or pay a fee for every “message” or order they put out to the market.
It is the first time a major investment bank has come up with a potential solution for regulating HFT and comes as brokers prepare submissions to an Australian Securities and Investments Commission consultation paper on automated trading.
Brokers are increasingly crossing client orders off-market in so-called “dark pools” to avoid contact with HFT. The growing use of HFT and dark pools – combined with high-profile “flash crashes” in the United States, where HFT is more common – has sparked debate about the safety and integrity of the local market. Yesterday ASIC asked all major brokers to provide detailed reports on how they use dark pools, which are estimated to account for 5 per cent of trades.
UBS, like most major investment banks in Australia, is involved in HFT. But its co-head of equities, Gary Head, said protecting the integrity of the market was paramount.
“There are some things that we support which aren’t necessarily great for our business, but we think they are actually right for the market structure,” he said.
Investors staying away due to fears of HFT
Mr Head said genuine investors were turning their backs on the sharemarket because of concerns about HFT. “Retail volumes are down for a number of reasons,” he said. “But fear around market structure is creating fear that shouldn’t exist, as the perception is worse than reality.”
HFT uses sophisticated computer algorithms to trade shares in fractions of a second. It is estimated HFT accounts for 35 per cent of volumes on the Australian sharemarket.
“Anything that can be done to ban or impede all this HFT nonsense is a good thing for the real investor,” said Investors Mutual’s Anton Tagliaferro, voicing the concerns of many fund managers.
Regulators around the world have been looking for ways to clamp down on the controversial trading strategy after it was blamed for triggering the flash crash in the US in 2010 and a number of other international market disruptions.
ASIC fights rogue algorithms
ASIC is finalising a number of measures targeting high-speed traders, including forcing them to install “kill switches” to prevent a rogue algorithm from infecting the market. But Mr Head warned that more specific measures were needed to force traders to abandon “predatory” behaviours and said hitting them with the new charge would reduce the risks to the market.
UBS’s proposals would rein in high-frequency traders, who often flood the market with millions of “messages” to buy or sell stocks which rarely result in a trade, frustrating genuine investors.
Under the UBS plan, certain trades that do follow ASIC-approved guidelines would be charged a 1.7¢ fee on every message sent to market. The money raised would replace a $27 million levy that ASIC charges stockbrokers and the stock exchange to pay for supervision of the market. High-frequency traders that act as market makers and agree to ASIC’s rules would be exempt from the fees. Rules might include forcing traders to leave orders in the market for a minimum of between half and one second, and placing limits on the minimum size and value of trades.
The plan would save UBS about $1 million a year that it now pays to ASIC. “It would be a cost recovery charge for market supervision, not an open-ended tax,” Mr Head said. “We think that could be applied to trades, more heavily skewed to those that are predatory.”
Stepping up surveillance of HFT: MEdcraft
ASIC chairman Greg Medcraft told a conference in Sydney this week that ASIC was “stepping up” its surveillance of HFT, while authorities in Germany have moved recently to tax investors who employ the strategy.
“Different parts of the market have different views on HFT,” Mr Head said. “Even if you wanted to kill it, you couldn’t. It is here to stay, but there are a few behaviours that concern some people in the market and that is what the negative press has been centred on, and if you address those issues specifically, the bad behaviour disappears and we can all co-exist in a good, high-integrity marketplace.”
ASX chief executive Elmer Funke Kupper has also raised the idea of a charge on certain financial transactions as a way of controlling HFT.
Because their funds can at times have a high level of cash, do-it-yourself super fund trustees are sometimes attracted to the idea of utilising this resource in a more sophisticated investment enterprise than simply buying an asset.
While the money in DIY funds is certainly meant to be put to good investment use, there are restrictions on certain activities that if pursued could get a fund into a lot of trouble.
One such activity illustrated by a reader question concerned a joint venture residential apartments property development where the DIY fund’s role, according to the reader, was to provide most of the finance.
Although the specific question asked whether the reader and his wife could acquire one of these apartments given the DIY fund’s involvement, super specialist Daniel Butler of DBA Lawyers focused this back to the strategy of the fund providing loan finance to the property development.
There is a problem with this strategy, says Butler, because it appears to suggest that the land on which the development has been carried out is owned by the reader and his wife and the DIY contributed the finance. This is a reasonable assumption, given the reader did not indicate that the land is owned by the fund.
Who owns the land is actually a crucial aspect of the activity, says Butler, given an important rule of law that applies when it comes to property development. This general rule of law is that anything that is affixed to land becomes part of the property owned by the owner of the land. The authority as far as this law is concerned is Megarry & Wade’s The Law of Real Property, published in 2008.
Broadly this rule, explains Butler, would result in the DIY fund having loaned money to the reader and his wife as any improvements would be owned by them as the property owners. Where it can mean trouble is that under superannuation law, a super fund is not allowed to lend money to a member or a relative of a member.
There is an important concept in superannuation law known as the sole purpose test, which states that the sole purpose of superannuation should be to provide retirement benefits for members of the fund. If the super fund’s cash was simply used as an easier source of finance to carry out the property development, says Butler, this amounts to a contravention of the sole purpose test. A breach of the sole purpose, he says, carries serious penalties such as potentially rendering the fund non-complying with a 45 per cent tax on the value of the fund apart from a certain tax free amount.
Instead of being owned by the reader and his wife directly, what if the land was owned by a company they were directors of?
In this case, says Butler, any loan from the DIY fund to the company controlled by the reader would be regarded as a loan to a related party, which is subject to a limit of no more than 5 per cent of the total assets of the fund. So if it was a $1 million super fund, no more than $50,000 could be lent to the company.
This 5 per cent limit is an ongoing restriction that must be continually monitored. Moreover, any DIY fund loan must be properly documented and reflect arm’s length commercial terms.
It’s a different story however, says Butler, if the land is owned by the super fund. While the ideal scenario then is that the super fund also has the money to finance any development, the fund could come to an arrangement to do a joint venture with the members or a related party. The major considerations then are that any financial arrangements are properly documented and occur on an arm’s length commercial basis.
Butler says many people think that joint ventures between members and their DIY super are a simple matter. They are not.
“We generally try to talk people out of arrangements where two sides are likely to involved and recommend instead that they contribute more money to the fund and do it all within the fund,” he says.
Even then, issues can arise where a member wishes to use a company they may have to develop the property, without realising it raises related party issues and all transactions must be at arm’s length.
Where trustees of a DIY fund want to be actively involved in developing land that the fund owns, says Butler, they are made to go through the paces of getting independent quotations from builders based on properly documented plans and specifications and making sure any services they plan to provide stack up to those quotations. They also have to be aware that complications can arise when it comes to acquiring building materials and being remunerated in any way for professional or business services they may provide.
Where a DIY fund trustee is a property developer, they can be remunerated if they are appropriately qualified and licensed builders and building is their normal business for supplying the same services to the public. And the remuneration should also be no more favourable to the DIY fund than the trustee might expect from an independent builder in the same circumstances.
Self-managed super funds offer great flexibility, but concerns that they are being oversold continue to surface.
The financial adviser Crystal Broadfoot says she is dismayed at the number of people she is seeing who have been poorly advised to set up a self-managed super fund (SMSF) – frequently because they have been drawn by the buzz around holding property inside your own fund.
”We do see the need for [DIY funds] in certain and limited situations, and that’s generally with your high net-wealth, high super-balance clients,” says Broadfoot, of the Melbourne-based firm Clements Dunne & Bell, a member of the Count Financial group.
”But we are dismayed at the amount of clients who come to us who have been, what we feel, incorrectly set up with an SMSF.”
Those people either have very low balances or rely totally on platform-administration services, ”which defeats the purpose of an SMSF” and adds an extra, expensive layer of fees to the costs already involved in having a DIY fund, she says.
Broadfoot sees a connection with the rule change that allowed DIY funds to borrow to invest, which has drawn property promoters to the SMSF sector.
A wealth management partner at HLB Mann Judd Sydney, Jonathan Philpot, has similar concerns.
”Many property spruikers are encouraging people with super balances of $50,000 – and even less – to purchase a residential property in their SMSF, with the property being geared to about 70 per cent,” he says.
His rule of thumb is that most people should not consider an SMSF unless they already have a balance of $300,000.
The first problem with the property strategy is that gearing does not make sense in a low-tax environment, Philpot says. It is better to use it where a taxpayer is on higher rates.
Second, focusing on property in this way means an SMSF may not be well diversified, and this will be so for a very long time while it is repaying the loan with rent and super contributions. There is also the challenge of meeting loan payments if the property falls vacant, he says.
An allied problem can be access to cash for members as they go into pension mode. ”You can’t sell the bathroom, you can’t sell the kitchen” to pay a pension, Broadfoot says.
At last count there were more than 478,000 DIY funds, holding $439 billion of assets, making them the largest and fastest-growing sector in superannuation. SMSFs now account for 31 per cent of super assets, ahead of retail funds (27 per cent) and industry funds (19 per cent).
The Australian Securities and Investments Commission’s Peter Kell told a conference of financial advisers in July that while SMSFs can have benefits for experienced consumers, they are ”not suitable for all investors”.
Kell says the regulator is concerned that not everyone is aware of the time and resources needed to run a fund; the expertise needed to manage it effectively; and the legal responsibilities, including their potential liability.
On the other hand, the chief executive of the SMSF Professionals’ Association of Australia, Andrea Slattery, defended SMSFs against the charge that they were being opened with low balances, saying the latest statistics show that both the average and the median balance of SMSF members were trending upwards.
Slattery points to the Cooper review of the superannuation system, which concluded in 2010 that there was no need for wide-ranging changes to the SMSF sector and, specifically, rejected the idea of a compulsory minimum.
Philpot says SMSFs offer people with healthy super balances a range of benefits, but the flip side is they can be complicated structures.
His rule of thumb of $300,000 is based on the likely compliance costs (for accounting, auditing and tax returns), which start at about $3000. At this level, the costs would be equivalent to a 1 per cent fee – in line with what you would pay for a managed super fund.
Then there are other transaction and investment fees to consider, such as share brokerage, fees charged by wholesale fund managers, and bank charges. Even though you are ”doing it yourself”, you may want to pay for advice and help with administration.
The $300,000 is not a hard-and-fast rule, though, Philpot says. Some people with lower balances may have plans to build their super quickly, and so an SMSF might make sense for them.
The benefits of DIY
If you can tick the boxes as far as being a good candidate for a DIY fund, there are some tremendous benefits, financial adviser Olivia Maragna says.
”Superannuation is now, in most cases, the biggest investment asset at retirement,” says Maragna, owner of Aspire Retire Financial Services. ”I’m finding that more retirees want to be able to have more control over it, because it does make up a large proportion of their assets.”
Maragna, named this month as one of six finalists in the Adviser of the Year awards run by the Association of Financial Advisers, lists some of the main advantages of a self-managed super fund as:
Control: You can decide on how much to contribute and where to invest those funds.
Security: Your member benefits generally are protected from creditors.
Flexibility: Retirement income options can be tailored to a member and their family’s specific needs.
Cost efficiency: Structured properly, an SMSF (which can have up to four members) can be cheaper than holding multiple superannuation funds.
Tax efficiency: You can minimise tax payable by the fund by using imputation credits available from dividends. Excess imputation credits are fully refundable to the SMSF.
Estate planning: An SMSF is the most flexible and tax-effective way for a member to provide lump sums or income streams to his or her surviving spouse, children or grandchildren.
The disadvantages: five questions to ask yourself
The Australian Securities and Investments Commission MoneySmart site suggests asking yourself these five questions:
â– Will I save money or waste it?
If you pay $3000 in professional fees to administer a self-managed super fund with just $60,000 in retirement savings, your expenses will be 5 per cent. You need to be sure you have enough money to absorb the fees, otherwise your retirement savings could disappear within a few years.
â– Will I lose valuable benefits?
Managed super funds usually offer life and disability insurance and a range of investment options. If you set up a DIY fund, you have to organise and buy these yourself.
â– Will my fund outperform a managed fund?
Super funds use professional managers to invest your super money. Can you do better than the professionals? If you’re thinking about setting up a self-managed super fund just because you’re not happy with your current fund, consider changing to another fund first.
â– Do I know enough?
Do you know all your legal responsibilities? Are you on top of the investment market? Do you know the tax implications? Ultimately you’ll be responsible for your fund, even if you receive incorrect advice from professionals.
â– What if something goes wrong?
Sometimes things can go wrong. For example, you may lose money because of fraud. But DIY funds don’t have access to the sorts of compensation schemes available to public super funds
Martin Parkinson’s proposal for expanded state land and payroll taxes is worth pursuing. As the Treasury secretary makes clear, none of the major political parties will agree to increase the GST on the states’ behalf. If the states need money, reformed payroll and land taxes would do less damage to the economy than the other taxes at their disposal.
Payroll tax, which was given to the states as a “growth tax”, is a close cousin of the GST, and a properly designed land tax is one of the least distorting taxes available to any government.
Moreover, raising more money from these taxes could result in less spending by state governments in the longer term.
The premiers claim to be the victims of Australia’s vertical fiscal imbalance, in which the federal government has most of the tax-raising powers and the states have half of the spending responsibilities.
But the vertical fiscal imbalance is a myth. The premiers have all the efficient tax bases they need to raise every cent they spend. They just choose not to use them.
And what politician in the world wouldn’t like to follow their example? Someone else imposes the taxes, and the premiers spend the money. It’s almost a politician’s definition of heaven.
But there are serious drawbacks for the rest of us. The first is a bias at the state level to increase spending.
After all, the political cost of spending an extra dollar is less when Canberra is raising most of the revenue, while the political benefit of cutting wasteful spending is reduced if a large part of the saving ends up with federal government.
Getting the states to make more use of their most economically efficient, or least distorting, taxes should be an important plus for the economy.
Yet there are economists who oppose the expanded use of these taxes precisely because of their efficiency. They see the inefficiency of the states’ current taxation systems as a natural brake on their spending.
From their perspective, the fact that the premiers gave away their payroll and land tax bases to attract investment from other states and to buy the votes of small business and property owners can be seen as a healthy outcome.
But denying states efficient taxes is a poor answer to the problem of wasteful state spending.
To the extent that they have been forced to curb their spending for budgetary reasons, state governments traditionally have cut infrastructure investment rather than reduce the number of public servants. Infrastructure might be important for productivity, but it doesn’t vote, and public servants do.
But I doubt that the absence of more efficient taxes is much of a deterrent to politically popular spending. The premiers are skilled at extracting more money from the federal government which raises its money mainly from income taxes that are less efficient than payroll and land tax.
The states also are willing to use private money for politically attractive projects, even when it compromises the efficiency of the infrastructure.
Privatisation is held up to the public as a ticket to smaller government and greater efficiency – and, when it is done properly, it can be.
But in NSW, for example, private investment in roads has affected road construction priorities. It is the roads most suitable to tolls that are built with the private money, regardless of whether they provide much of a benefit to the community.
The Lane Cove tunnel in Sydney is an example of a very expensive road with a low social or economic value. For the state, the cost of the tunnel was justified neither by the time saved by motorists nor the gains in local property values. The government would have done better to have borrowed the money and built the roads the state really needed.
State tax reform definitely should be on the agenda, but it is important that we get it right.
For example, the broadened payroll tax should be a “national” tax, probably collected by the federal government on behalf of the states, with exactly the same base in all states and limited scope for individual state governments to set different rates. If states wanted to compete with each other for investment, they should compete on the rate, but not by giving away the base.
There should be the smallest possible tax-free threshold, both to avoid the problem of businesses staying small to avoid the tax, and to keep the rate as low as possible.
The economic distortion created by a tax rises disproportionately with the tax rate. It also increases with the gaps in the base. The current state payroll taxes incorporate both these inefficiencies and more.
The broader the base and the lower the rate, the better for the economy a reformed payroll tax would be.
The IMF’s central forecast of global growth of 3-plus per cent is partly based on the assumption that Europe will adopt policies that gradually ease financial conditions further in Spain and the other periphery economies.
Alan Mitchell Economics editor and Jacob Greber
The International Monetary Fund says there is a one-in-six chance of a deep world recession next year, which would increase the Gillard government’s surplus challenge.
The warning, in the IMF’s twice-yearly World Economic Outlook report, came as the organisation again cut its forecasts for global growth in 2012 and 2013.
Growth this year is now expected to be 3.3 per cent – 0.2 percentage points less than was forecast in July. Growth in 2013 is forecast at 3.6 per cent, or 0.3 percentage points below the July forecast.
For Australia, which is forecast by the IMF to grow 3.3 per cent this year and 3 per cent in 2013, the main impacts of a global recession would be a further sharp fall in iron ore, coal and other mineral prices, a decline in real national income and an increase in unemployment.
Reserve Bank of Australia deputy governor Philip Lowe sought to downplay the IMF’s lowered global forecast, saying if it came to pass, the expansion would still be “around or just a fraction below average growth for the last 30 years”.
“What’s really happening in the global economy is that the advanced economies are growing very slowly, but the emerging economies still are growing quite strongly,” Dr Lowe said on Tuesday. “So we’re getting reasonable growth in the global economy – but around average actually – but the distribution between the advanced economies and the emerging economies is different to what we’ve seen in the past.”
Australia would be in a good position to benefit from this shift.
“The demand for resources in China will remain strong over the medium term . . . and there are no major imbalances in the Australian economy so I think we’re well placed to deal with average growth in the world economy,” he said.
Treasurer Wayne Swan said the IMF had reaffirmed the strength of Australia’s economic fundamentals in the face of a weaker global recovery.
“The government remains on track to return the budget to surplus in 2012-13, well ahead of every major advanced economy, although weaker global growth and lower commodity prices will clearly make this task more challenging,” Mr Swan said.
He said the IMF report showed Australia’s economy was the world’s 12th largest, after passing Spain in 2011. Canada, India and Russia were 11th, 10th and ninth respectively.
The IMF’s forecasts showed the world economy labouring just above the 3 per cent growth level regarded by the fund as a world recession marker.
But it estimates there is a 17 per cent probability of global growth falling below 2 per cent next year. That, it says, compares with a probability of only about 4 per cent in April.
“Downside risks have increased and are considerable,” the IMF said of the global economy in the report, released at the organisation’s annual meeting in Tokyo.
It warned that fiscal consolidation was weighing on demand “with the impact of spending cuts and tax rises amplified by large fiscal multipliers”.
At the same time, it said, the positive impact of accommodative monetary policy “may be diminishing”.
“The financial system is still not functioning efficiently . . . in many countries, banks are still weak, and their positions are made worse by low growth,” IMF’s chief economist Olivier Blanchard said. “As a result, many borrowers still face tight borrowing conditions.”
The IMF’s central forecast assumes Europe will adopt policies that gradually ease financial conditions in Spain and other periphery economies, and that US politicians prevent the drastic automatic tax rises and spending cuts known as the “fiscal cliff”.
In keeping with a two-speed economy, Australia now has a two-speed economic debate. For the second time this year, the International Monetary Fund has slashed its projected economic growth rate among advanced countries in 2013, raising the prospect of a world economy stranded upon a growing mound of government debt.
The Australian Council of Trade Unions, on the other hand, apparently oblivious to anything beyond its own navel, decided it was time to demand a new corporate tax system. Rather than contribute to the debate about what might be causing the global stagnation, such as vastly overgrown governments, bloated bureaucracies or rampant addiction to welfare, the ACTU wants the government to consider replacing the existing corporate tax system with a byzantine, largely untested alternative. The idea of an “allowance for corporate equity” is to tax companies earning above a particular rate of return, those deemed to be earning “economic rents”, at a higher rate than less profitable ones, thereby raising revenue more efficiently. In effect the ACTU is calling for a version of the Rudd government’s failed resource super-profits tax to apply across the entire economy.
The current company system is not perfect. It unduly favours debt funding and harbours a panoply of exemptions and deductions that create work for lawyers and accountants at the expense of genuine commerce. Taxing economic rent has galvanised normally quarrelsome economists since Henry George’s advocacy of land tax in the middle of the 19th century. But a “super-profits” tax is neither practical nor timely. Revenues would swing even more dramatically with the economic ebb and flow than under existing company tax collections, and the adjustment burden for businesses would be too much for many. What is more, it would almost certainly increase the total tax burden as the government hid behind economic orthodoxy to extract a cash grab.
The timing could not be worse; despite the biggest resource boom in Australian history, the federal budget remains mired in deficit. The magnitude of the change would also clog Australia’s reform pipeline for years, putting off sorely needed cuts to the rate of Australia’s company tax.
Australia’s company tax rate at 30 per cent is eighth-highest among 34 countries in the OECD. Of all the federal government’s taxes, the Henry review showed company tax was the most damaging to welfare, and not to shareholders. The ACTU’s opposition to cutting the company tax reveals either a blithe disregard for the welfare of its members or wholesale ignorance of economics. Companies are legal concoctions: the burden of company tax falls in large part on workers, who receive lower wages, and customers, who pay higher prices.
Maintaining a high company tax rate is particularly foolish in Australia, which has long relied heavily on foreign investment. Wayne Swan greeted the IMF’s report by boasting of the Australian economy’s latest climb up the global economic league table, overtaking Spain and Mexico. Once the boom ends, Australia’s position won’t be so assured: as the IMF suggested, the country’s economic growth is bolstered by Asian resources demand.
Australia’s limited tolerance for reform would be far better directed at the expenditure side of government than revenue. Rather than a debate about modifying taxes, we desperately need one about cutting spending.
With the presidential race entering its final month, President Barack Obama’s campaign is trying to paint Republican nominee Mitt Romney as a fabricator on his tax policy and other issues, while the challenger is turning his attacks to the incumbent’s foreign policy.
The President is seeking to regain footing after a lacklustre debate performance as Mr Romney tries to build momentum and make up ground in a race where he trails nationally and in the states most likely to decide the election.
The campaign has entered a phase where the electoral map has narrowed to as few as eight states, with two debates remaining between Mr Obama and Mr Romney. That reduces the margin for error in a contest that has been close for four months.
Mr Romney this week will be in one of those states, Virginia, to deliver a foreign affairs speech that will characterise Mr Obama as a proponent of a policy that has allowed tensions, particularly in the Middle East, to fester and threaten US interests.
Mr Romney’s effort to round out his national security credentials at the tail-end of a campaign he has focused almost exclusively on the domestic economy and jobs comes as Mr Obama’s camp charges that the former Massachusetts governor is obscuring his true positions on a range of issues, including healthcare and education.
”We’re not going to be lectured by someone who’s been an unmitigated disaster on foreign policy,” Jen Psaki, an Obama campaign spokeswoman said. ”This is his fourth or fifth retake at trying to lay out his foreign policy positions.”
On tax cuts, too, the President’s re-election aides said Mr Romney was trying to redefine his position late in the race.
The peak union body has demanded Treasury advance plans for an economy-wide super-profits tax, a move that could open a new row with banks and miners before next year’s election.
Just weeks after Wayne Swan’s business tax working group rejected the plan as too complex to pursue now, ACTU assistant secretary Tim Lyons has written to the Gillard government’s tax reform process declaring the system should still be “seriously examined” as an option, and modelling done.
Mr Lyons has also criticised sections of the business community for withdrawing their support from the tax-reform process and warned that unions were opposed to an across-the-board cut to the company tax rate of 30 per cent. Under the model known as an “allowance for corporate equity”, super-profitable companies would pay tax of 40 to 50 per cent, but many businesses would pay less tax because they could claim a deduction for “normal” returns to equity investors.
“The movement towards a system that taxes economic rents more heavily, and normal rates of return to capital more lightly, may bring substantial economic benefits to Australia,” Mr Lyons has told the Business Tax Working Group secretariat, which is part of Treasury.
“We do not pretend that such a reform would be easy, nor that the case for the change . . . has been comprehensively made out. It has not.
“Instead, it is an idea that is meritorious and deserving of further investigation.”
Last night, Mr Lyons said the ACTU had not reached a conclusion about the model, but believed it could help businesses struggling with the two-speed economy and wanted a national debate on it. “We think if you are going to have tax reform then let’s do it in a way that lifts the profitability and business case for those businesses that would otherwise be a bit marginal given the other things that are happening in our economy,” he told The Australian.
The fresh push has angered miners – who have deemed the tax reform process to be critically flawed for not reflecting the risks to projects from sharply lower commodity prices and escalating costs – and the banks, which thought they had escaped being hit with a super-profits tax.
Minerals Council of Australia chief executive Mitch Hooke said: “The minerals industry is interested in genuine taxation reform, not cherry-picking different revenue proposals.”
Australian Bankers Association acting chief executive Tony Burke said only a few countries had adopted the economy-wide super-profits model and some later backed away from it.
Mr Burke said to introduce an economy-wide super-profits model would require a higher headline company tax rate to pay for deductions on normal returns that would cost “in the billions”.
“It would be very difficult to implement; there would be a whole range of unintended consequences,” he said. Labor’s attempted introduction of a resource super-profits tax in 2010 created extraordinary hostility between miners and the government and ultimately contributed to Kevin Rudd losing the prime ministership.
Julia Gillard ended Labor’s war with the miners by negotiating the mineral resources rent tax – which had a 30 per cent headline rate, lower than the 40 per cent proposed under the RSPT – with the three biggest miners, BHP Billiton, Rio Tinto and Xstrata.
Miners say the RSPT debate damaged Australia’s reputation as an investment destination and fear the business tax working group process will add to this.
Last night, a spokesman for Mr Swan said: “The government will consider the recommendations of the BTWG when we receive its report later in the year.” The group concluded in its discussion paper, released in August, that the “allowance for corporate equity” model should not be pursued in the short to medium term but might be worth considering in the long term. It warned company tax collections would be more sensitive to economic cycles under such a system.
The group also concluded the system could prove impossible to fund without increasing the corporate tax rate that would apply to above-normal profits – at odds with Julia Gillard’s demand that cuts to the company tax rate were the top priority for the group and that these be revenue neutral.
The ACTU is arguing that this does not stop the group from “further developing and examining the case for an ACE, including through requesting additional modelling from the Treasury”.
“While the group may believe that an ACE is not an appropriate reform option for the short term, it should contribute towards the longer-term policy development process by constructively engaging with the ACE option.”
The Henry tax review said the system was “worthy of further consideration and public debate” but warned it would create opportunities for tax arbitrage if Australia was one of the few countries using it. The ACTU has pointed to arguments by John Freebairn of the University of Melbourne’s economics department at last year’s tax forum that the system would hit companies exploiting natural resources or who had a new technology breakthrough. The union push comes as the debate over tax reform splits the business community. Many sections of corporate Australia have withdrawn support for the government’s business tax changes, saying the Treasurer’s demand that a promised company tax could only be delivered by finding existing savings from within the business tax system is fatally flawed.
Business also fears that as the government tries to deliver a budget surplus in increasingly tough economic conditions, it could use these savings identified by the group to help shore up the budget, rather than using it to fund a corporate tax cut.
Mr Lyons is a member of the working group. So too are the leaders of bodies including the Business Council of Australia, which has criticised the options for funding a company tax cut that the group has canvassed.
Wayne Swan and Bill Shorten seem intent on chasing yet another dubious record, this time as the biggest super taxers of super savers in Australia’s history.
This comes hot on the heels of Swan’s record $173 billion in accumulated deficits over his first four budgets and Shorten’s efforts over the past two years to make us the world champions in costly financial services red tape through his complex Future of Financial Advice changes.
It is increasingly clear the two senior Labor ministers are now setting their sights, yet again, on those Australians doing the right thing by saving to achieve a self-funded retirement.
The consistent feedback I’ve been getting from right across the superannuation industry is that Swan is desperate to get his hands on more cash from Australians’ super savings and that Shorten is hard at work helping him to find it.
There is no doubt that the minister who is supposed to be the Minister for Superannuation is currently assessing every part of people’s superannuation journey, from contributions to retirement incomes, for opportunities to raise more revenue through increased taxes and charges on their super.
Labor already has a terrible track record when it comes to increased taxes targeting Australians’ saving to achieve a self-funded retirement.
Back in 2007 Kevin Rudd had promised that he would make no changes to superannuation laws – “not one jot, not one tiddle”.
Yet at the first available opportunity, Swan broke that promise in his first budget back in 2008. He has broken that promise now on nine occasions so far, generating $7.8 billion in additional government revenue.
So far Labor has increased taxes on voluntary savings by reducing concessional contribution caps from $50,000 and $100,000 down to $25,000 across the board. Anyone who wants to save more than $25,000 per annum – which includes their compulsory super contribution – will now have to pay more tax. Labor has also dramatically reduced the co-contribution for low income earners and doubled the super contributions tax for high income earners. They have fiddled with the definition of income to ensure more income is captured in the super tax net and they have increased capital gains tax revenue from super. If that’s not enough, there’s more coming.
All these additional Labor Party taxes are counterproductive. They make it harder for people to save enough for their retirement and will force more people on to the pension.
This is short-term politics to deal with the fiscal mess Labor has created over four years in government. Because of Labor’s addiction to wasteful spending they are constantly casting around for more cash through ever new and increased taxes or more debt.
Right now the Treasurer’s problem is that revenue is down against the always unbelievable estimates he made in the budget, while spending is up. Labor is struggling to achieve even the wafer thin $1.5 billion surplus they promised for 2012-13 and they’re facing another $120 billion budget black hole moving forward.
Swan seems to think he can use Australians’ super like an ATM to fix his budget troubles and Shorten seems too weak to resist him.
The other day Shorten was quoted as saying Australia needed “a national conversation about the best policy settings for the final third of people’s lives”.
It is true we need to ensure Australians have more options available to help them manage the risk that they will live longer than their money will last in retirement and to better manage market risk in the final third of people’s lives.
But that should be achieved by removing regulatory barriers currently preventing product innovation, not by increasing taxes on contributions or retirement incomes. What Bill Shorten should have done is guarantee that Labor will not use the coming Mid-Year Economic and Fiscal Outlook to yet again increase taxes on people’s retirement savings.
Because all these changes and increased Labor taxes undermine people’s confidence in the superannuation system, lowering the level of contributions and consequently the level of savings available in retirement. Voluntary super contributions are already down significantly in the context of a more challenging market environment. The last thing we need is more Labor taxes on voluntary savings making a bad situation even worse.
The Gillard government should heed the advice it received from Bill Kelty when he warned them against further tax increases on superannuation. We need a government that encourages people to save enough so that they can enjoy a comfortable retirement.
Importantly, we need a government that spends less, which therefore can tax less and which is focused on growing our productivity and our economy more strongly.
Stronger growth would not only increase our prosperity, it would also improve returns on Australians’ super savings and lead to increased government revenue without the need for all these new and increased Labor Party taxes.
The bipartisan refusal of Labor and the Coalition to embrace real tax reform and countenance any increase or broadening of the goods and services tax has presented our leading econocrats with a policy conundrum. While a higher GST with fewer exemptions would go a long way towards make Australia’s tax system simpler and more transparent, the issue is currently viewed by both sides of politics as electoral suicide.
Federal Treasury secretary Martin Parkinson thinks that one way around this political roadblock could be to look at the payroll taxes that the states use to collect the largest slice of their annual tax revenue. He said in a speech to the John Curtin Institute of Public Policy in Perth on Friday that both payroll and land taxes “should be explored for the opportunity for reform”. The proposal by Dr Parkinson was quickly rejected by the states, in part because it would put the onus of finding the revenue needed to help close what promises to be a yawning federal budgetary deficit onto them.
The suggestion also bumps up against a very necessary review of the tax now being undertaken, led by NSW Treasurer Mike Baird, which is focusing on harmonising the different state approaches to payroll tax.
The different rates, thresholds and even the means of working out the thresholds and payroll sizes vary between the states, with those differences cited as a major disincentive to companies looking to expand interstate.
Dr Parkinson correctly noted that, with the terms of trading having reached their crest and now falling, productivity growth must once again become the key driver improving Australian living standards. Yet at the same time, growth in tax revenue is waning while community expectations about what governments will deliver in the future are increasing.
He noted that payroll tax raises one third of the state’s revenues, yet this year almost all the states have cut the tax rate and increased the threshold at which it applies. Dr Parkinson also points out that a common reason for opposing payroll tax increases is the perception that it is a tax on jobs. But citing US Congressional Budget Office estimates, he argued the tax had substantially the same effect as a consumption or income tax in that it is passed on to the workers in the form of lower wages.
Despite his arguments, one of the reasons the states have been increasing the threshold for the tax is that small businesses are known to hesitate before expanding payroll so that they go over the threshold. This point was made strongly and repeatedly by state and business leaders in the subsequent reaction to his remarks.
Australia’s elected leaders have placed our econocrats in a political straitjacket by refusing to discuss the GST as part of a broader debate on tax reform. So it is refreshing that Dr Parkinson has not taken that as an excuse to abandon the cause of reform at a time when Australia needs to steel itself against heightened global uncertainties.
With his forceful denial of charges that he would raise taxes on the middle class, Mitt Romney used the first presidential debate, in Denver, to regain his footing in the battle over taxes.
The presidential nominee directly challenged President Barack Obama’s assertion that the Republican tax plan would finance big new breaks for the wealthy by wiping out popular deductions for those earning less than $US250,000 ($A245,000) a year. ”I know that you and your running mate keep saying that … but it’s not the case,” Mr Romney said. ”I will not reduce the taxes paid by high-income Americans. And … I will not, under any circumstances, raise taxes on middle-income families. I will lower taxes on middle-income families.”
Hours later, Mr Romney released a new TV ad arguing that Mr Obama was the bigger threat to middle-class wallets, his second ad in a week. The ads seek to shift the conversation to more comfortable territory for Republicans: which candidate is more likely to raise taxes?
The Romney campaign seized on a comment on Thursday by Vice-President Joe Biden as proof that he and Mr Obama want to raise taxes on the wealthy. ”Yes, we do, in one regard,” Mr Biden said in Iowa. ”We want to let that trillion-dollar tax cut expire so the middle class doesn’t have to bear the burden of all that money going to the super-wealthy. That’s not a tax raise, that’s called fairness, where I come from.”
Public opinion polls have shown that Mr Obama has held a consistent advantage on the question of who voters trust more to handle taxes. A Washington Post poll last month of the crucial swing state of Ohio found Mr Obama ahead on the tax question by 17 points.
Mr Romney’s sharp performance in front of 60 million viewers cheered conservatives. ”He made the point that this is a pro-growth tax cut,” said Grover Norquist, president of Americans for Tax Reform.
Mr Romney’s plan calls for cutting income tax by 20 per cent for people at all income levels, repealing the estate tax and wiping out capital gains taxes for middle-class families.
Those cuts would drain nearly $5 trillion out of the Treasury over the next decade, according to analysts. Mr Romney has vowed to replace the lost revenue by scaling back ”loopholes and deductions”, but has declined to say which ones.
That lack of detail created an opening for Mr Obama, who latched on to a study by the non-partisan Tax Policy Centre, which declared Mr Romney’s goals ”not mathematically possible”.
The centre found that Mr Romney’s rate cuts would reduce tax collections from individuals by $360 billion in 2015.
To avoid increasing deficits, the plan would have to generate an equal sum by slashing tax breaks for mortgage interest, employer-provided healthcare, medical expenses and childcare, all of which benefit the middle class. Even if the upper brackets were targeted first, the study found, there would still be a shift in the tax burden of roughly $86 billion a year from those making over $200,000 to those making less. About 95 per cent of the population would see their taxes go up by about 1.2 per cent, an average of $500 a year.
Mr Obama has cited the study relentlessly, with little response from Mr Romney until this week. ”Amid this barrage, Mr Romney has … played dumb, as in silent,” The Wall Street Journal griped on the morning of the debate. Meanwhile, Mr Romney has said his earlier remarks dismissing 47 per cent of Americans as government dependents were ”completely wrong”.
”Clearly in a campaign with hundreds if not thousands of speeches and question and answer sessions, now and then you are going to say something [that] doesn’t come out right,” Mr Romney told Fox News.
”In this case, I said something that’s just completely wrong. I absolutely believe … my life has shown that I care about the 100 per cent.”
Treasury secretary Martin Parkinson has warned that Labor’s big-ticket promises such as the National Disability Insurance Scheme and schools funding will have to be paid for by tax increases, user-pays options or spending cuts.
Dr Parkinson, in a speech in Perth yesterday, warned that the growing community expectations of what governments should provide were compounding pressures on the budget at a time when revenue growth was slower than expected and the nation faced increased spending in health and aged care because of an ageing population.
He also challenged state government calls for more GST revenue, arguing they should reform their payroll tax bases, which had been eroded over time.
Calling for a mature debate on the role of government, the tax system and Australia’s preparedness to capitalise on the enormous growth in Asia, Dr Parkinson warned that if it did not occur “we run the serious risk of being overwhelmed by the challenges we face and missing the opportunities open to us”.
Having reached the peak in the terms of trade, as commodity prices fell future growth in living standards would be driven by productivity growth. While the comparative advantage of Australia’s natural resources was “obvious”, there was no clear comparative advantage in the services sector, which stood to grow as incomes rose in the Asia-Pacific.
He said governments at all levels needed to create an environment for productivity improvement through focusing on education, skills and infrastructure and through efforts to remove unnecessary regulations.
Dr Parkinson’s address comes as Wayne Swan seeks savings measures ahead of the mid-year economic review to maintain his budget surplus in the wake of revenue writedowns caused by lower commodities prices and as the government seeks to fund big-ticket promises such as the NDIS, the Gonski education reforms and a revamp of the dental scheme.
The address also comes as business groups have walked away from the government’s Business Taxation Working Group, declaring proposed savings measures to fund a corporate tax cut unacceptable.
Opposition Treasury spokesman Joe Hockey seized on Dr Parkinson’s speech. “What the Treasury secretary is really saying is that Wayne Swan is not in control of his budget and has no idea how he is going to pay for all the promises Labor keeps making and all the expectations they keep raising.
“Australians just want the Gillard government to come clean and say which new or increased taxes they intend imposing to fund their $120 billion black hole.”
But a spokesman for Mr Swan said: “The importance of tight fiscal discipline has been explained at length in numerous speeches by the Treasurer and Treasury secretary and is demonstrated by our track record of finding savings to fund the priorities that matter for Australians.”
In his address to the John Curtin Institute of Public Policy, Dr Parkinson argued the presumption that particular services would always be publicly provided was not one ” we can afford to make”.
The retirement age for judges and the military could be lifted under a suite of proposals designed to keep Australians working – and paying taxes – for longer.
And the op shop lady could in future be classified as a ”worker”, rather than a volunteer, so as to be entitled to workers’ compensation if she slipped over in the store.
The proposals are among a suite suggested in a discussion paper released yesterday by the Australian Law Reform Commission for comment. Age Discrimination Commissioner Susan Ryan said volunteers not being covered by workers’ compensation entitlements hit small or not-for-profit organisations, which often relied on older volunteers to exist, hardest. ”With the insurance required, it’s often either too difficult or two expensive to get volunteers, and some organisations that rely on volunteers say that they can’t get them because they can’t pay for them,” she said.
The federal government commissioned the discussion paper, saying urgent work needed to be done to remove Commonwealth barriers to older people finding work and staying in the workforce.
It expects that by 2044-45 one in four Australians will be aged 65 or older – up from 14 per cent reported in the 2011 census – and has tasked the commission with finding ways to keep ageing Australians in the workforce, and off the aged pension.
The commission suggested forcing employers to give workers aged 45 and older four weeks’ notice if their work was being terminated, up from one week in some cases. And it said the government should consider reviewing the mandatory retirement age for the judiciary and military. Currently, the compulsory retirement age for Australian Defence Force personnel is 60 years and 65 years for reservists.
Judges are forced to retire at 70, but Ms Ryan – who served as a part-time commissioner on the panel – said changing this could be difficult, as the retirement age was written into the constitution.
She said discrimination remained built into superannuation law, which did not allow workers aged 75 and older to voluntarily top up their super, nor their employers to gain tax benefits from contributing more than the mandatory amount.
Council on the Ageing national policy manager Jo Root said the proposals were ”in the right direction”, particularly those designed to remove impediments to older people planning their financial security.
The ALRC is seeking submissions on the discussion paper by November 23, and will report to the government by March 31, 2013.
The Australian Chamber of Commerce and Industry (ACCI) supports the aim of a lower corporate tax rate but not at the expense of other tax concessions.
The federal government’s Business Tax Working Group is tasked with finding a way to fund a cut in the 30 per cent company tax rate within the existing tax system. ACCI director of economics and industry policy Greg Evans said Australia needed to be competitive with Asia, where the average company tax rate is 23 per cent. “We certainly support a company tax reduction, but we don’t want it funded by the removal of other tax arrangements that business enjoys,” Mr Evans told reporters in Canberra.
ACCI’s latest quarterly survey of business investment confidence released on Tuesday showed that business taxes and government changes remained the number one constraint on investment for the 17th consecutive quarter. Mr Evans said business is worried about potential tax increases in the mid-year budget, due before the end of the year, and next May’s budget. “Business certainly doesn’t want to wear any new taxes,” Mr Evans said.
“Business simply can’t afford increased taxes at this current point of time.”
Asked whether he supported the argument that the GST rate should be increased if other taxes were eliminated, Mr Evans said that was a long-term economic aspiration. “I don’t think there is much appetite at the moment to consider an increase in the level of the GST,” he said.
“That’s a longer-term reform that needs to be sold by governments, and I don’t think we are in an environment where that is going to happen at the moment.”
He said broadening the base of the GST – which does not include fresh food, health or education – was also an important reform to be considered in the future. “We probably failed at the outset with implementation of the GST that we didn’t look more carefully at these issues.”
Labor has the politics of superannuation badly wrong. Its core constituency would be much better off without it. So would the economy.
But Labor has long promoted super as ‘gift’ to ordinary workers that it compels employers to provide. Recently, however, the superannuation minister Bill Shorten acknowledged that compulsory contributions to super come from money that could otherwise be paid as normal wages.
Rather than being forced to hand the money over to fund managers to punt volatile financial markets, many employees could prefer to spend the money on their own priorities, such as raising a family, paying off a mortgage and improving their education.
Shorten is pushing ahead with Labor’s decision to increase compulsory super contributions to 12 per cent of salaries. Yet Treasury modelling has shown that even the existing 9 per cent, plus the age pension, will produce an incongruous outcome in which low income earners have a higher disposable income in retirement than while working. Shorten is now fighting union resistance to trading off the increase to 12 per cent against wage rises.
If employers were allowed to convert the 9 per cent to a normal part of salaries, this would boost take home pay by $85 for those on average weekly earnings of $1333 and by around $45 for someone on the minimum wage of $589. Finding better things to do with this money than putting it into super should not be hard. Australian Prudential Regulatory Authority data show the average rate of return on super over the ten years to June 2011 was a meagre 3.8 per cent.
Governments could also find better things to do with the money they spend on superannuation tax concessions that are heavily biased towards high income earners. The research director for financial information company Rainmaker, Alex Dunnin, says about half the value of the concessions goes to the 8 per cent of superannuation members who are in a self-managed super fund (SMSF). Tax office figures show 75,000 of these funds have assets between $2 million and $10 million. Two have more than $100 million. Yet 90 per cent of SMSFs have only one or two members. Dunnin estimates the average balance in not-for-profit industry funds is $44,000.
The Henry tax report notes the cost of lifting contributions to 12 per cent will outweigh any savings on the age pension. Well before the 12 per cent rate is fully in place, official projections show the tax concessions will cost the budget over $42 billion in 2014–15.
Even after subtracting offsets, scrapping the concessions should increase revenue by well over $30 billion a year. The concessions consume vast sums that could improve productivity and wellbeing through increased outlays on education, childcare, health, transport and well designed tax cuts. Until it tackles the concessions, Labor can forget about making serious headway on a new disabilities scheme, dental care and disadvantaged schools.
A recent Productivity Commission report rejected calls to give saving for age care the same tax concessions as super. It said, ‘Such subsidies perform poorly on equity grounds as they offer the greatest benefit to those with the greatest capacity to save.’
The report also highlights how compulsion produces inferior economic outcomes: ‘Compulsory saving imposes a deadweight loss as it distorts decisions about which savings vehicles to use, as well as between consumption and savings. In particular, younger people may be less able to invest in their preferred mode of savings (for example, owning their own home).’
Compulsory super also prevents the efficient allocation of resources by artificially boosting fees paid to fund managers and administrators by several billion a year. Not even the local car industry could dream of winning an assistance package in which governments compelled all Australians to buy its products, regardless of whether they had better things to do with their money.
The vast bulk of the money in super is used to buy and sell existing financial assets. Only a tiny proportion goes directly into creating new productive capacity. Often one super fund merely swaps the ownership of a parcel of shares with another.
Paul Keating says he changed superannuation while Treasurer from an elite system to one in which ‘the bloke running behind the garbage truck could have super’. But a new elite has left the garbo in the dust. Unlike someone still working for the minimum wage, members of this elite pay no tax on retirement income from super, even if it is millions of dollars a year.
Tax-free super income is also exempt from the means test for prescription drugs. This allows rich retirees to buy drugs for $5.80 a prescription compared to $35.40 for a minimum wage earner. But Labor refuses to abolish this rort, let alone tax those over 60 at normal rates.
Given their limited resources, governments should not fund massive budget subsidies for super as well as the age pension. Once governments fund the pension as a decent safety net, they have fulfilled their basic welfare obligation to retirees. Anyone who wants to save more can do so.
Apart from being impervious to financial market gyrations, the age pension is immune to a new problem peddled by the finance industry called ‘longevity risk’ — that your money could run out before you die. The age pension has the great advantage that it never runs out.
House prices in Australia’s capital cities leapt 1.4 per cent in September, suggesting that recent rate cuts by the central bank are buoying the market.
The finding in the latest RP Rismark Home Values Index was the largest monthly increase since March 2010.
On a quarterly basis, house prices in the country’s eight capital cities rose two per cent.
Price gains were strongest in Adelaide at 2.4 per cent, followed by Perth (1.6 per cent), Sydney (1.5 per cent), Melbourne (1.4 per cent) and Brisbane (1.1 per cent).
Hobart, Darwin and Canberra all reported falls – by 0.2 per cent, two per cent and 0.6 per cent respectively.
The result suggests that the weakness in the housing market from in the year has since dissipated.
RP Data research director Tim Lawless said improvements in the market since mid-year were linked to the Reserve Bank of Australia (RBA)’s cash rate cuts in May and June.
“It’s no coincidence that housing market conditions bottomed out at the end of May, after the Reserve Bank cut the official cash rate by 50 basis points,” he said.
“A further cut of 25 basis points in June and the anticipation of further rate cuts in the pipeline appear to have instilled renewed confidence in the housing market which has driven the growth in home values.”
The RBA was expected to consider this turnaround at its board meeting on Tuesday, Mr Lawless said. “The bank will want to keep a lid on housing prices from a financial stability perspective, while at the same time ensure interest rates are low enough considering the decline in commodity prices and Australia’s terms of trade,” he said.
The cash rate has remained steady at 3.5 per cent since June. Economists expect the RBA will deliver borrowers at least one more rate cut before the end of December.
With a housing and rental affordability crisis placing growing financial stress on many Australians, there’s no more room for a ‘policy is biased towards the wealthy’, Philip Soos from Deakin University argues.
Few Australian housing policies are more contentious than negative gearing.
Despite the publicity it has received and its popularity with government and property investors, little analysis of negative gearing can be found within easy reach, with much of it accessible only in academic journals. Only an occasional fragment is found in the mainstream media.
Australia’s policy on negative gearing is considered a sacred cow by investors and politicians, with Prime Minister Julia Gillard, Treasurer Wayne Swan and Federal Housing and Homelessness Minister Brendan O’Connor ruling out changes to this policy. The reason for this obstinacy is that negative gearing allows a property investor to deduct losses against the investor’s personal tax liability at their marginal tax rate (MTR), a tax-minimisation strategy adopted by 1,110,922 taxpayers who vote. Property is run at a net loss when interest payments and property-related expenses like repairs and maintenance exceed rental income.
The strong Australian economy has not experienced a recession since the early 1990s. This, along with reduced personal tax burdens, real rising incomes, extensive property subsidies and tax breaks, and rapid increases in property values, delivered an economic environment conducive to negative gearing. From 1996 to 2010, housing prices surged by 130%, adjusted for inflation and quality.
The present housing and rental affordability crisis is placing tremendous financial stress on many Australians as housing and rental prices have outpaced wages, and provided the spark for the public to question the validity of subsidising investors, whether they choose to gamble on making a return by selling property at a higher price or eventually becoming cash-flow positive when rents rise to exceed outgoings.
Despite the fact that negative gearing has existed for a long time, much assertion but surprisingly little evidence has been made to justify this policy across all classes of investment, whether it be shares, business, or property investment. The supporters of negative gearing provide negligible evidence to show that is it a sound policy.
Deductibility and tax minimisation under negative gearing
It is common sense that both businesses and investors should be allowed to deduct the costs directly incurred in making an income, but labour is unable to do so. A salaried employee incurs substantial costs in the course of earning a wage (for instance, accommodation, travelling to and from the workplace, and childcare) but government policy bars deduction of these costs against wages
There is a double standard in operation here. From a distributional or equity perspective, this policy is biased towards the wealthy, as business and investment capital ownership is concentrated into this class, which relies proportionately less upon wages.
The disparity between wage earners and investors is exacerbated when negative gearing is considered. The net income loss from an investment property reduces the investor’s personal tax liability, even though that loss was generated elsewhere. Earning a wage and earning income from an investment are two separate activities and should be treated as such. Business commentator Alan Kohler accurately summarised the inconsistency between investment and employment: Five years ago Treasurer Peter Costello told Australians: “Work for a living and we’ll tax you at close to 50 cents in the dollar; speculate and we’ll only take 25 cents. Not only that but, as a special deal – while stocks last – we’ll pay half your speculating costs.”
To sum up this line of reasoning, investors are unduly advantaged by the present taxation arrangements relative to labour. Investment capital is overwhelmingly concentrated in the wealthiest households, who deduct investments costs against income generated, have the highest personal incomes and thus MTRs, can deduct investment losses against their personal tax liability (negative gearing), can carry forward losses and lower their effective MTRs.
Clearly, the tax system is biased towards the rich in terms of cost deduction and tax liability minimisation. Some of this bias can be reduced by maintaining consistency: labour should be allowed to deduct costs against wages but disallow negative gearing for investors.
Increasing the rental stock and lowering rents.
This is the primary argument in favour of negative gearing: that it provides an incentive to investors to purchase property for rent, thus increasing the supply of rental properties as a proportion of the total housing stock. As the reasoning goes, negative gearing holds rental prices down, benefiting tenants.
The evidence shows otherwise. 92% of residential property investment is for the purchase of existing dwellings rather than those newly constructed, meaning that former owner-occupiers and tenants have to purchase or rent elsewhere, respectively, thus resulting in little to no net increase in the supply of rental dwellings.
In the long term, it makes little sense for the supply of rental properties to increase compared to the total residential stock unless there is a profound upward swing in housing prices, with investors spurred into the market on expectations of making a substantial profit through realising capital gains upon sale. Accordingly, there is little incentive when long term data from Australia and other countries shows that housing prices track inflation, despite numerous and ongoing booms and busts.
Negative gearing is also badly targeted as high-income professionals and millionaires also allegedly receive lower rents. If policymakers are concerned about rental affordability, there are other options to pursue. The obvious candidate is the Centrelink Commonwealth Rent Assistance (CRA) scheme, a subsidy provided to low-income tenants.
The effects of quarantining negative gearing in the 1980s
The favourite scare story promulgated by the housing lobby is that when the Hawke/Keating government quarantined negative gearing during 1985-87, it caused rental prices to surge, quickly leading to its reinstatement. Fortunately, not only did the evidence refute this urban myth, it showed that negative gearing can be safely quarantined, if not abolished.
Rents rose in Perth and Sydney only, remained steady in Melbourne and Canberra, and fell in Brisbane, Adelaide, Hobart and Darwin. If the lobby was correct, quarantining should have adversely affected all capital city rental markets equally, not just two out of eight (even when factoring in a lagged response). There were confounding factors at work: rising interest rates, introduction of capital gains tax and a stock market bubble.
Oddly enough, while the lobby claims that quarantining will increase rents, the inverse is not considered: rents have escalated from 2006 onwards while negative gearing was in effect. Perhaps they could claim that rents would have been higher otherwise. This, however, is an ad infinitum argument; that is, negative gearing is not generous enough, so by increasing the scope of tax deductibility, it can serve to further constrain rents.
How much does negative gearing cost?
ATO data provides an estimate of the cost of negative gearing. In 1993-94 it was $850 million, fluctuating around the $1 billion mark over the next several years. As investors piled into the market, the cost rapidly escalated to a peak of $3.8 billion in 2007-08 before falling to $2.9 billion in 2009-10. Over the last seventeen years, negative gearing has cost taxpayers an inflation-adjusted $33.5 billion (2012 dollars).
What to do?
Policy outcomes can be enhanced by quarantining negative gearing deductions to the purchase of newly constructed properties, but not for established properties. It would be even better to remove it, as it makes little sense to subsidise property investors, regardless of the reasons for investment when there are better policies for helping low-income tenants.
Also, the negative gearing debate presupposes the existence of income taxation, which has no justification when evidence suggests that substantial amounts of tax revenue can be raised from far more efficient bases. Productive individuals and business already bear the brunt of income tax, which is merely one of 125 burdensome taxes.
According to the property lobby, it’s too dangerous to reform negative gearing, let alone abolish it. Fortunately, there’s no requirement for anyone to believe the lobby, given the weight of evidence against their assertions and the fact that they have enough conflicts of interest to fill a book.
Philip Soos consults to the tax-reform organization Prosper Australia.
The federal government’s Business Tax Working Group may be able to do some useful work in tightening up business concessions as a way to pay for a reduction in the corporate tax rate, but much of the work in eliminating concessions has long been done. What remains may be difficult and perhaps even harmful to eliminate, and is no substitute for root and branch tax reform to deliver the real business tax cut which might make a difference.
Prime Minister Julia Gillard originally promised a cut in the corporate tax rate of just 2 percentage points, which would have done very little. But even that was not delivered, with the government spending the money instead on voter handouts. A much more useful approach that has been suggested would be to reduce company tax from 30 per cent to 25 per cent, with the cut to be paid for by eliminating the exemptions from the goods and services tax (GST) and increasing the GST rate.
But now the working group has to find enough savings in existing tax concessions to pay for a tiny reduction in company tax on offer, with only limited options including concessions for R&D spending, exploration and prospecting, accelerated depreciation rates on capital equipment, and in thin capitalisation rules for foreign owned companies.
Of those, the most frequently mentioned option in the submissions to the working group are the thin capitalisation rules, which prevent foreign companies loading up subsidiaries with debt, rather than equity, in order to repatriate profits as interest payments. Australia’s general ratio of debt, three times that of equity, is seen as too loose.
After that change, the going gets harder. The accelerated depreciation rates were introduced in 2006-07 because an international comparison found our depreciation rates were not as favourable as those of other advanced countries.
As shown by the Minerals Council of Australia submission released on Friday, any changes in this area would be strongly contested. But the council does have a point in that one problem is that the working group’s terms of reference are far too narrow, allowing for only piecemeal changes to just business tax. And that just might make things worse.
Australia’s economy faces a double-barrelled hit over the next year to 18 months as real income falls for the first time since the global financial crisis and weaker mining investment detracts from growth.
The deteriorating outlook means the Reserve Bank of Australia will be forced to cut official interest rates at least once by the end of the year and possibly by as early as tomorrow, according to The Australian Financial Review’s latest authoritative quarterly survey of economists.
The survey shows analysts are increasingly concerned that the slowdown in China, the biggest buyer of Australian exports, is partly due to a permanent shift towards lower levels of growth.
“China isn’t going back to the halcyon days of 10 per cent growth,” said BT Financial Group chief economist Chris Caton. “Furthermore, the composition of the growth will shift from construction and infrastructure spending towards less commodity-intensive consumer spending … we won’t be getting the lazy 1 to 2 per cent increases to real national income every year.”
Merrill Lynch forecasts that gross domestic income, which measures gross domestic product adjusted for the terms of trade, is likely to contract by 0.1 of a per cent in the September quarter.
This would be the first time GDI has contracted on a quarterly basis since the June quarter in 2009 when it fell 1 per cent.
Merrill Lynch forecasts GDI to grow 1.1 per cent for the 2012-13 financial year, below population growth of 1.5 per cent a year, indicating a fall in real income per capita.
GDI is considered to be a more accurate measure of national prosperity than GDP as it takes into account the prices Australia gets for its exports compared to the prices it pays for its imports.
It also supports Hawke government economist Ross Garnaut, who made headlines last month when he warned Australians to prepare for a fall in living standards as the early phase of the resources boom fades.
Falling terms of trade, driven by the plunge in iron ore and coal prices, are expected to be at the heart of the Reserve Bank board’s deliberations tomorrow, as well as the stubbornly high Australian dollar.
Eighteen of 19 economists surveyed by Financial Review predict the official cash rate will be cut to 3.25 per cent from the current 3.5 per cent over the next three months, with six tipping two cuts.
Merrill Lynch chief economist Saul Eslake said the falling terms of trade in conjunction with low productivity levels would result in a slump in income.
“Ordinarily productivity growth is a major driver in trends in real income. We had a significant slowing in productivity growth in the 2000s but nobody noticed in terms of income because it was more than offset by the rising terms of trade,” Mr Eslake said. “Now we’re in a position where the terms of trade are falling. Unless we lift our productivity growth, it’s inevitable that the fall in terms of trade is going to result in lower income growth.”
Australia’s terms of trade have fallen 7 per cent in the 12 months to June, as Chinese economic growth slows and the prices of benchmark commodities and exports plummet. Economists are predicting terms of trade will fall still further in the September quarter before rebalancing, with Westpac chief economist Bill Evans predicting a drop of as much as 4 or 5 per cent.
The terms of trade boom after the financial crisis had previously seen GDI rates of growth well above GDP, with the gap reaching its peak in the March quarter of 2010, when GDP grew at 0.7 per cent and GDI grew at 2.2 per cent.
Thanks to the declining terms of trade and a sudden drop in commodity markets, GDI growth rates fell below GDP for the first time since the global financial crisis in the December 2011 quarter.
RBC Capital Markets economist Su-Lin Ong said the fall in GDI was probably just the beginning of a sustained fall in national wealth.
“Generally over the last decade as you had rising terms of trade your disposable income has outpaced your GDP. What you saw during the global financial crisis is terms of trade plummet and income fall below production,” Ms Ong said. “We’ve just started to see that. The gap’s been narrowing for a couple of quarters and it’s now turned negative. Very clearly, that is a taste of what’s to come over the next few quarters.”
The effect of the falling terms of trade on government revenues and its ability to bring the budget back to surplus have been highlighted by ratings agency Standard & Poor’s and Treasurer Wayne Swan in recent weeks.
“Although the resource investment boom still has a way to run, the recent decline in commodity prices coupled with the sustained high dollar has impacted on some investment decisions – particularly for early stage projects – and will also have an impact on government revenues,” Mr Swan said yesterday. “That means we’ll need to find additional budget savings to deliver a surplus this financial year.”
Resource revenue could be as much as $20 billion below forecasts for the 2012-13 financial year thanks to lower commodity prices. Company tax receipts also fell by $876 million in the 2011-12 financial year, marking large reductions in two important components of government revenue.
The federal budget works with nominal measures of income like GDI rather than GDP, despite the fact GDP is more widely discussed.
JPMorgan economist Ben Jarman said the fall in GDI was a particular concern for the government in the second leg of the mining boom.
“This is the issue for the government, that over the last few years as commodity prices went up over that period, they got less bang for their buck than they did last time in the first iteration of the resources boom,” Mr Jarman said.
“Because while prices were going up this time, the nature of the tax system is such that you don’t get that much direct windfall from it. [Now] you’re not getting the same accompanying froth in asset prices more broadly, that was really the transmission the government was relying on in the last round of the mining boom.”
Falling terms of trade and national income were likely to place downward pressure on wages, creating knock-on effects through the economy, Mr Jarman said.
“The broader point is you have a situation for five or more years where the terms of trade was a very large addition to national income, which was rising far above the pace of GDP,” Mr Jarman added.
“That has been essentially subsidising the labour market because firms were getting a lot of top-line revenue growth, and that would justify the high wages that were being paid. If you flip that story on its head and see that the top-line growth is turning around then all of a sudden labour starts to look quite expensive and we think that is going to put real pressure on hiring.”
Corporate Australia has called for an end to the government’s business tax changes aimed at cutting the company tax rate, declaring that Wayne Swan’s process will leave the economy worse off.
Financiers, miners and oil and gas producers, the drivers of the economy, have rejected the Treasurer’s demand that a promised company tax can only be delivered by cutting existing concessions to the resources industry, warning that the reform process is fatally flawed and threatens mining investment.
The Business Council of Australia yesterday joined other business groups in rejecting all options put forward by the government’s controversial Business Tax Working Group, saying the “piecemeal” process was “excessively limited and risked doing more harm than good to the national economy over the medium to longer term”.
“The revenue needed for a material company tax cut can’t be found through other business tax changes without very deep impacts on some companies and sectors,” the BCA’s Jennifer Westacott said.
Miners, who fear targeting resources to fund business tax relief will damage Australia’s competitiveness, said the business tax reform process was critically flawed.
“Industry investment has been strong, but future investment is at risk due to weaker global conditions, sharply lower commodity prices, a high dollar and escalating costs,” the Minerals Council of Australia said.
“This competitive reality is not reflected in the Business Tax Working Group discussion paper,” the submission said.
“Securing the benefits of Australia’s comparative advantage in mineral resources requires stable and globally competitive tax arrangements that encourage investment. With the minerals resources industry among the highest-taxed industries in Australia, further instability in taxation arrangements carries the risk of making Australia a less attractive destination for minerals resources investment,” it said.
“The minerals industry considers the BTWG process, as constituted, to be marked by critical flaws when measured against criteria for genuine tax reform, strong principles, compelling empirical evidence and good process.”
The MCA submission concurred with the BCA claim that “piecemeal change (under the guise of addressing the ‘patchwork economy’) will actually worsen the fiscal regime in Australia, decreasing international competitiveness and adding to sovereign risk at a time when future minerals industry investment is highly uncertain.
“There is a non-trivial risk that the BTWG process could leave the business tax system more complex than it found it. There is no basis for concluding this would yield a net benefit to the Australian economy,” the MCA said.
The BCA has called on the government to scrap the process and roll the BTWG’s findings into a 10-year reform process building on the Henry tax reforms. It also wants the GST to be part of the discussion.
“Only a comprehensive tax reform process will allow a genuine debate about issues such as the commonwealth and state and territory funding arrangements, and tensions around who should be accountable to deliver essential services in health, aged care and education,” Ms Westacott said.
“We considered whether revenue-neutral reforms could be found to boost productivity and deliver net benefits to business and the broader community, and we have taken account of the challenging economic circumstances and longer-term revenue raising needs of the nation.
“On balance we found that delivering any meaningful company tax cut purely from changes to business arrangements risks significant damage to investment and growth, particularly in key sectors,” she said.
Wayne Swan faces a fight with a sceptical business community as he pushes ahead with a corporate tax cut paid for by a raft of forced business tax savings being recommended by the Business Tax Working Group.
Labor promised to fund a 1 per cent company tax cut from the proceeds of the minerals resource rent tax in the May budget but shelved the commitment after it became clear it could not secure parliamentary support for the changes. Instead, the Treasurer agreed to consider company tax cuts, but said they must be offset by savings in the business sector.
Higher taxes on mining and wealthy individuals are needed to ensure the economy serves the needs of “people and nature”, Australian Greens leader Christine Milne says.
Senator Milne used her first National Press Club speech since taking over the leadership from Bob Brown in April to outline her party’s short and long-term economic strategy.
Labor’s minority partner in government will be involved in talks in the lead-up to Treasurer Wayne Swan’s release of the mid-year economic and fiscal review in coming months.
“The Greens are calling on the government to either work with us to find savings and revenue in a forward-thinking, caring manner, or use the upcoming MYEFO to delay their ill-advised quest for a surplus at all costs to closer to 2015/16,” Senator Milne said in Canberra on Wednesday.
Senator Milne said both Labor and the coalition had a “surplus fetish” that many economists and business leaders have called unnecessary and counter-productive.
She said removing fuel subsidies for mining companies and taking away superannuation tax concessions for the rich could raise $13.2 billion over three years.
Broadening the base of the minerals resource rent tax, lifting the top income tax threshold to 50 per cent for millionaires, and adopting a 0.1 per cent tax on financial transactions could boost this revenue by billions more, she said.
“Tax is not a dirty word. It is part of being a fair and sensible society that invests in caring for its own and preparing for the future,” Senator Milne said.
“And the great majority of Australians agree with that.”
Asked later whether the Greens would abolish the first home owners grant or impose capital gains tax on the family home, Senator Milne said the party was currently drafting its housing policy, but it would focus on homelessness, affordability and city planning.
“We recognise, if we are going to spend more we have to fund it,” she said.
Spending priorities would include boosting research and development to three per cent of GDP, more clean energy to achieve a long-term 100 per cent renewable energy target and restoring funding to education and health.
Senator Milne conceded that the Greens would face problems getting preferences from either Labor or the Liberals in key inner-city seats at the 2013 election. “Liberal and Labor will clearly do the best they can to try and destroy the Greens,” Senator Milne said. “(But) the future is on our side.”
She quoted Ghandi as saying: “First they ignore you, then they ridicule you, then they attack you and then you win. And we are in the attack phase.”
“What we have to do is renew our efforts to lift our primary vote,” she said.
Australia has spent the last 40 years all but eliminating tariffs on imports. Now it seems the pendulum has swung so far that we’re willing to put tariffs on local businesses while allowing foreign companies to trade tax-free. That is effectively what the $1,000 low value threshold for the GST and duties for goods purchased from overseas is doing.
For those who’ve missed the debate over the last couple of years, largely pushed along by Harvey Norman founder Gerry Harvey, the point is that imported goods aren’t subject to GST or duties if they are worth less than $1,000.
That gives most online purchases an automatic 10 per cent price advantage over local sales, with many goods having a 15 per cent price advantage due to the low value duty exemption, and up to 20 per cent on some items (including clothing from certain countries).
Put simply, the internet is helping to democratise tax evasion. In the past, it was mostly the very wealthy who could afford to dodge a large part of their taxes by complex schemes to shift their money to some exotic tax haven.
But, with an increasing share of revenue coming from consumption-based taxes post-GST, all of us can now share in a little piece of tax dodging by jumping on our computers to order something for under $1,000 tax free online.
The attraction of the tax loophole is demonstrated by a Sydney Morning Herald poll that shows only 9 per cent of readers thought the GST threshold should be lowered to $30 – then again, 24 per cent of people thought the GST should not be applied at all.
Those of you with a good memory and an interest in the topic would remember that the Productivity Commission concluded last year that the costs of collecting GST and duties on goods at a significantly lower threshold would outweigh the revenue collected and benefit to local retailers.
The Commission found that lowering the low value threshold to $100 would raise just under $500 million and may cost consumers and businesses over $1.2 billion. Scary figure, huh? However, like any economic report, those findings were based on a series of assumptions (mostly freely acknowledged by the Commission). The key one being that the current tax collection system would remain unchanged, as would its costs.
Specifically, the Commission assumed that the threshold for both duties and the GST would be lowered. Duty declarations are much more complicated than the information required to collect GST, thus contributing $630 million to the cost figure, but only $110 million in revenue.
That leaves $385 million in revenue at a cost of around $600 million (an estimated $378 million for Customs and $228 million for Australia Post and courier services) – still a bad deal. However, one of the key recommendations of the Productivity Commission report was an investigation into reforming the way low value parcels are processed.
That investigation found much lower estimated collection costs, especially for parcels coming through the mail, with costs to keep falling as volumes increase and processing technology improved.
The Low Value Parcel Processing Taskforce estimated that in 2014 at a $100 low value threshold the collection cost would be $15.04 per mail item, while the average revenue collected would be $22.31. The estimated collection costs were higher for air cargo. That is not a very efficient tax change, as more than two-thirds of the revenue is lost in costs.
However, if the aim is not increasing revenue but increasing equality between local and offshore retailers, it is hard to argue against a change that will earn cash strapped state governments some extra money as well. The Productivity Commission does argue against such a change, citing the deadweight loss of all the administrative and compliance costs which diverts resources from more productive activities.
Yet most kinds of administrative and, let’s be frank managerial, activity is really a deadweight loss so defined – yet public and private sector administration is necessary to allow productive activities to continue. The Productivity Commission compares the high cost of GST collected on low value imports to that collected on domestic sales, which is only around 1.4 per cent of the total revenue collected.
However, it would arguably be better to view the cost of GST being collected on low value parcels as part of the total cost of collecting GST. That is because, in the modern communications and transportation age, the whole GST system will be gradually undermined if overseas suppliers continue to escape tax free on most of their transactions while local businesses do not.
Already, large Australian retailers are starting to set up overseas outlets to exploit the tax loophole.
That’s not to mention the revenue that is already being lost, and will increasingly be lost, on services and intangible goods (like software, music and movies) downloaded or supplied from overseas sites. While tax-free overseas online sales are clearly not the only, and probably not even the main, reason why many Australian retailers are struggling, neither are they getting smaller or going away.
Research by Ernst & Young for the National Retail Association estimates that overseas online retailers will be better off to the tune of $7.6-12.7 billion in turnover in 2015 if the status quo is maintained than they would be if the low value threshold was abolished.
That report estimates between 20,000-33,400 Australian retail jobs could be saved by abolishing the low value threshold, with flow on benefits to the economy and government revenues. While these retail industry commissioned figures clearly need to be taken with a grain of salt, it is clear that the current low value threshold disadvantages local stores compared to foreign rivals. The Productivity Commission says postage costs offset this tax disadvantage for most smaller purchases.
Yet Australian bricks and mortar retailers pay some of the highest retail rents in the world, which has to be passed through to prices in the same way postage adds to the costs of goods supplied online. Australian-based retailers also have to pay Australian wages, superannuation and penalties, which can be considerably higher than some of the countries many overseas online retailers ship from.
The commission’s report shows there certainly are not many other countries willing to give overseas retailers such a break on their domestic competitors. It makes sense the thresholds are low – where is the integrity and logic in a tax that actually encourages citizens to both avoid it and send their money outside the local economy?
Assuming the low value parcel processing taskforce is right in its cost estimates, it seems the most compelling reason to subsidise Australians’ growing love of online shopping on overseas sites is public anger if this tax haven is taken away.
As the economy still refuses to respond to the chancellor’s policies, should he breach his fiscal rules in the Autumn Statement?
George Osborne might have a feeling of déjà vu as he prepares to release his Autumn Statement on December 5. Last year, downgraded growth forecasts led to the estimates for tax receipts being revised down and those for welfare spending being revised up.
Unfortunately, revisions in the same direction can be expected this autumn: the average of independent forecasts for borrowing in 2015/16 is now more than £10bn higher than it was just six months ago. Last year, Osborne responded by allowing borrowing to rise in this Parliament and extending the planned period of deep spending cuts by one further year. Might he do the same again this year?
The chancellor will need to consider the two fiscal targets that he chose to set himself in June 2010. The first, his ‘fiscal mandate’, requires that by the end of the forecast horizon any remaining expected deficit must be explained only by temporary weakness in the economy or by spending on public sector investment. In other words, he cannot expect to borrow to finance non-investment spending on an ongoing basis.
Even if revisions to the forecast mean that new tax rises or spending cuts are required to bring borrowing back on track, these could still be planned for as late as 2017/18. This could be done without breaching the fiscal mandate, assuming the usual practice of extending the forecast horizon by one year each autumn.
More problematic for the chancellor is his ‘supplementary target’, which states that public sector net debt, as a share of national income, should be lower in 2015/16 than in 2014/15. These dates are fixed. We will not know whether or not this target has actually been met until April 2016 but can assess the likelihood using Office for Budget Responsibility forecasts.
In June 2010, the official forecast was that public sector net debt would climb until 2013/14 and then fall, giving the chancellor some wriggle-room against his target. By March 2012, upwards revisions to forecast borrowing over this Parliament were expected to be enough to erode almost all of this room to manoeuvre, with debt forecast to peak in 2014/15 and then fall by just 0.3% of national income in 2015/16. So even at the time of the last Budget there was little more than a 50/50 chance that the chancellor would meet this target on current plans.
If the OBR does now expect that public sector net debt is more likely to rise than fall in 2015/16 on unchanged policies, how should Osborne respond in his Autumn Statement? Assuming he chooses to accept the OBR’s diagnosis there would be three options: continue with policies where the chances of meeting the target are less than 50/50, change policy so that compliance with his target would be more likely, or change the target.
While the fiscal mandate has much to commend it, not least because it allows the government some time to respond appropriately when faced with shocks, the same is not true of the debt target. Forcing debt to fall between two fixed dates does not ensure long-run sustainability, since it does not constrain the government from allowing debt to rise inappropriately before or after those dates. Also, compliance could require the government to implement bad fiscal policies, since there are circumstances under which it would be more desirable for public sector debt to rise rather than fall over a 12-month period.
Therefore, regardless of whether or not the OBR’s next forecast suggests that debt is more likely to rise than fall in 2015/16, the chancellor should drop the supplementary target in his Autumn Statement. Since the fiscal mandate on its own does not limit the liabilities the government accumulates, it would not be sufficient to ensure long-term fiscal sustainability.
Therefore a replacement for the supplementary target would be needed. While it is important to ensure that other market players retain belief in the government’s commitment to fiscal sustainability, getting such a target right, and the timescale in which it should be achieved, is more important than having it in place straight away. It might also be possible to get a broad political consensus over these issues.
Rather than rushing to announce a replacement for the debt target in this year’s Autumn Statement, the chancellor should instead announce a consultation on the design of a new target to conclude in time for next year’s Budget.
Should the chancellor wish to boost further the credibility of the government’s fiscal consolidation plan, he should commit to holding a Spending Review before the end of next year to clarify how the spending cuts pencilled in beyond March 2015 are intended to be achieved.