Bruce Muirhead, University of Waterloo

The Australian government’s intervention in the dairy crisis by offering concessional loans to struggling farmers has prompted suggestions that other types of regulation - such as a dairy floor price - might be needed.

The dairy industry was deregulated more than a decade ago; perhaps it’s time Australia looked to other countries for models to fix the system.

The current situation facing the Australian dairy industry is the same the world over. The European Union and the United States come to mind, as milk supply outweighs demand. But they provide assistance to their dairy farmers through subsidies or other support that helps to keep them viable.

Canada does not compete internationally in the dairy sector as it maintains a supply management system introduced in the early 1970s. Dairy is not subsidised, as government provides no support, and the price paid to farmers is negotiated among stakeholders.

When I explained this Canadian supply management model to Victoria dairy farmers, as part of my research earlier this year, they rejected the idea. However the current situation may cause some of them to reconsider this position.

While the Canadian model works for Canadian farmers, a supply managed system would be more difficult for those in Australia given that about 40% of Victorian dairy is exported and exports don’t happen with supply management. But Australia’s share of the global market is decreasing over time, despite the best efforts of Australian dairy organisations and farmers, and the number of farms continues to decline. Perhaps Australia will end up with a system resembling a supply managed one through market mechanisms.

I interviewed a total of 45 farmers and dairy stakeholders in Australia during February and March of this year, nearly half in Queensland and the remainder in Victoria and Tasmania. I was interested in how the Australian dairy model works, especially as it is cited by the business press in Canada as one that we should adopt given their dislike of Canada’s regulated system.

What is the supply management model? Briefly, it matches domestic demand with domestic supply and exports are non-existent. The system is based on quotas - for example a kilogram of milk solid costs C$25,000 in the province of Ontario where I live, and it represents about one cow’s worth of production. Producers need at least 50kg of milk solids to run a decently remunerative operation.

Stakeholders representing producers, consumers, processors, the restaurant association and others meet annually to determine price, not government. Included in this is a profit guarantee for farmers that allows them to make long-term decisions and maintain a middle class lifestyle while milking on average about 70 cows. It also means they are immune to this latest global crisis, and to future ones.

And if supermarkets decide to use milk as a loss leader, it is the deep-pocketed supermarket that takes the hit, not the farmer. The price paid to the latter is guaranteed by negotiation, which creates stability.

Clearly, this is not how it operates in Australia where the supermarkets, according to one Queensland dairy producer, “must bruise the farmers to give them a loss leader.” Nor is the price consumers pay for milk in Ontario out of line with that charged by Coles and Woolworths, the real regulators of Australian dairy. Southern Ontarians pay the equivalent of the infamous A$1.00 per litre – A$4.00 for Canada’s four litre container, and have done so for years.

I found in my research that Victoria’s dairy farmers are in favour of privatisation and deregulation. They talked a lot about efficiency and how they are among the world’s more efficient farmers, and Canadians must surely not be, given their system.

Perhaps this is true if efficiency is measured by getting the greatest amount of milk for the least input. But Australian dairy farmers fall behind by other parameters.

Ontario dairy farmers, for example, employ robotic technology at a much greater rate than their Victorian counterparts. New dairy barns are being put up all over the province and a majority of them install robots to do their milking. Ontario now has hundreds of farms using milking robots.

The situation in Victoria could well come to that of New Zealand’s, where cows may be culled and the survivor’s rations severely cut back, as farmers are unable to feed supplements in such an adverse economic climate.

In an interview, as part of my research, one New Zealand dairy farmer told me he was into “starvation mode” for his cows because of cost. He was feeding them with grass only and when that ran out, there was nothing else. He was certainly running an efficient farm, but at a significant cost to his own mental health and to that of his cows’ wellbeing and ability to provide milk.

One Victorian farmer told me that even before the announcement of cuts to the milk solids price, he and his colleagues “farmed at the margins". When prices are robust, so are farmer’s livelihoods, but when they collapse, as they always do in a commodity situation, so do their livelihoods.

This results in another vicious cycle of dairy farmers quitting the industry which leads to further instability. As another interviewee told me, following the cut:

“We will wait and see and hang on for dear life.”

Might the future of Victorian dairy be Queensland, where farmers suffered much of what their Victoria counterparts are now experiencing more than a decade ago after deregulation, and dairy is now a niche industry?

As one Queensland interviewee emphatically instructed me about Canada’s model:

“Don’t give away [the] regulated system!”

Now is the time for Victoria to consider the advice of this farmer and introduce more regulation.

The Conversation

Bruce Muirhead, Professor of History and the Associate Vice President, External Research , University of Waterloo

This article was originally published on The Conversation. Read the original article.

 

 

 

 

 

 

 

 

 

 

Superannuation measures
 

Accumulation phase and Contribution Measures

Concessional contributions cap will be reduced

The annual cap on concessional superannuation contributions will be reduced to $25,000 from 1 July 2017. There will be one cap for all taxpayers irrespective of their age.

The cap is currently dependent on the age of the taxpayer as on 30 June of the previous financial year:

  • under age 49 - $30,000
  • aged 49 and over - $35,000

 

GEM Capital Comment

The reduced concessional contributions cap of $25,000 does not apply until 2017-2018.  Clients should consider taking advantage of the current higher concessional cap of $30,000 (under age 50) and $35,000 (age 50 and over) in the 2015-2016 and 2016-2017 financial years.

 


Catch-up concessional superannuation contributions will be allowed

From 1 July 2017, individuals will be allowed to make additional concessional contributions where they have not reached their concessional contributions cap in previous years.

Access to the unused cap amounts will be limited to individuals with a superannuation balance less than $500,000.

Amounts are carried forward on a rolling basis for a period of five consecutive years. Only unused amounts accrued from 1 July 2017 can be carried forward.

The Government has recognised that annual concessional caps can limit the ability of people with interrupted work patterns to accumulate superannuation balances commensurate with those who do not take breaks from the workforce. Such individuals would include stay at home parents and/or carers. Allowing them to carry forward their unused concessional cap provides them with the opportunity to ‘catch up’ if they have the capacity to do so, and choose to do so.

The measure will also apply to members of defined benefit schemes. The Government will undertake consultation in this regard.

 

GEM Capital Comment

The ability to carry forward unused concessional cap amounts appears to apply to everyone who has contributed less than the concessional cap, not just those who take breaks from the workforce such as home parents and carers.
 

 

Harmonising contribution rules for those aged 65 to 74

From 1 July 2017, the Government will remove the existing restrictions on people aged 65 to 74 from making superannuation contributions for their retirement.

People under the age of 75 will no longer have to satisfy a work test and will be able to receive spouse contributions.

This measure is intended to simplify the superannuation system for older Australians and allow them to increase their retirement savings, especially from sources that may not have been available to them before retirement, including from downsizing their home.

Currently, the work test applies which requires individuals aged 65 or over to be in gainful employment for at least 40 hours within 30 consecutive days in a financial year before their super fund can accept any contributions for them.

Introduction of this measure will effectively make the work test irrelevant past 1 July 2017.

 

GEM Capital Comment

Clients are currently required to work 40 hours within 30 consecutive days in the financial year they make a contribution over the age of 65.  This proposal will remove this requirement and make it  easier for older clients to contribute to super.

When combined with the life-time non-concessional cap this proposal could allow non-working clients aged 65-74 who were previoulsy not eligible to contribute to make non-concessional contributions of up to $500,000 after 1st July 2017.  It also would appear to open the door to tax deductible super contributions for those 65 - 74 who receive other taxable income such as a Government Superannuation Pension.

 

 

Personal superannuation contributions will be tax deductible

From 1 July 2017, all individuals up to age 75 will be able to claim an income tax deduction for personal superannuation contributions. This effectively allows all individuals, regardless of their employment circumstances, to make concessional superannuation contributions up to the concessional cap.

Beneficiaries of this change include:

  • individuals who are partially self-employed and partially wage and salary earners; and
  • individuals whose employers do not offer salary sacrifice arrangements will benefit from these changed arrangements

Currently, there is ‘a maximum earnings as an employee’ condition which needs to be satisfied in order to claim a deduction for personal superannuation contributions. Broadly, less than 10% of the total of taxpayer’s assessable income, reportable fringe benefits and reportable superannuation contributions may be in relation to an eligible employment activity. This essentially means that many self-employed professionals who work independently but are deemed employees under the superannuation guarantee law cannot make further voluntary deductible contributions to super.

 

GEM Capital Comment

This announcement will dramatically simplify the eligibility requirements for a member to qualify to claim a deduction for a personal super contribution.  The requirement to not be an employee during the financial year or to satisfy the 10% test will be replaced with a single requirement to be under age 75.

The announcement also gives employees more flexibility and allows them to make personal deductible contributions in addition to super guarantee and salary sacrifice contributions, to use up any unused concessional cap at the end of the year.

 

 


A new lifetime cap for non-concessional superannuation contributions

The Government will introduce a $500,000 lifetime non-concessional contributions cap. This lifetime cap will be available to all Australians up to and including the age of 74.

For taxpayers aged 75 and more existing rules will remain – only mandated contributions can be accepted by their superannuation fund.

The cap will take into account all non-concessional contributions made on or after 1 July 2007. This is the time from which the ATO has reliable contributions records.

The measure will commence at 7.30pm (AEST) on 3 May 2016.

Contributions made before commencement cannot result in an excess. However, excess contributions made after commencement will need to be removed, otherwise penalty tax will apply.

The cap will be indexed to average weekly ordinary time earnings.

The cap will replace the existing annual non-concessional contributions caps of $180,000pa (or $540,000 every 3 years for individuals aged under 65).

This measure is intended to improve the sustainability of the superannuation system. According to the Government, the change will continue to provide support for the majority of Australians who make non-concessional contributions well below $500,000. Further, there will be more flexibility around when people choose to contribute to their superannuation.

Existing arrangements in respect of CGT cap (set at $1.415 million for 2016-17 financial year) will be retained. Effectively this means that small business taxpayers eligible for CGT concessions can place proceeds from realising their business into the superannuation system.

 

GEM Capital Comment

 

To determine how much of the lifetime non-concessional cap has been utilised with prior non-concessional contributions, clients will need to add their non-concessional contributions since 1 July 2007 from all funds to determine how much counts towards their lifetime non-concessional cap.

While the Government states the ATO has reliable contribution records since 1 July 2007, it is not clear whether clients will be able to access this information.  Clients may need to contact the relevant super funds for confirmation.

Clients who have previoulsy utilised the bring-forward provisions will need to carefully review their situation to determine whether they have exhausted their lifetime cap.

Prior to recommending a non-concessinal contribution, advisers should ascertain the amount of lifetime non-concessional contribution cap that the client has available.

The introduction of the lifetime non-concessional cap may limit the ability to implement a recontribution strategy.  Strategies such as spouse contributions which count against the spouse's lifetime non-concessional cap may assist.

Advisers may wish to refrain from providing advice to make non-concessional contributions until the amount of a clients non-concessional contributions made since 1 July 2007 can be verified.

 

 

Improving superannuation balances of low income spouses

From 1 July 2017, the Government will increase access to the low income spouse superannuation tax offset by raising the income threshold for the low income spouse from $10,800 to $37,000.

 


A new Low Income Superannuation Tax Offset (LISTO)

The Government will introduce a Low Income Superannuation Tax Offset (LISTO) to reduce tax on super contributions for low income earners, from 1 July 2017.

The LISTO is a non-refundable tax offset for superannuation funds, based on the tax paid on concessional contributions made on behalf of low income earners. The offset will be capped at $500.

The LISTO will apply to fund members with adjusted taxable income up to $37,000 that have had a concessional contribution made on their behalf.

This measure is to ensure that low income earners do not pay more tax on savings placed into superannuation than on income earned outside of superannuation.

The measure essentially extends the operation of low income superannuation contribution (LISC), which is set to expire on 30 June 2017, under another name.


Division 293 threshold will be reduced

From 1 July 2017, the Division 293 threshold will be reduced from $300,000 to $250,000. This threshold is the point at which high income earners pay additional 15% contributions tax on concessional contributions.

This measure is designed to improve sustainability and fairness in the superannuation system by limiting the effective tax concessions provided to high income individuals.

 

 

 

Pension phase measures

Introducing a new $1.6 million superannuation transfer balance cap

The Government will introduce a $1.6 million transfer balance cap on the total amount of accumulated superannuation an individual can transfer into the retirement phase. This cap will take effect on 1 July 2017.

Subsequent earnings on these balances will not be restricted.

Where an individual accumulates amounts over $1.6 million, they will be able to maintain this excess amount in an accumulation phase account, where earnings will be taxed at 15%.

This cap will limit the extent to which the tax-free benefits of retirement phase accounts can be used by high wealth individuals. It will effectively force funds in excess of $1.6 million either to remain in accumulation phase with investment earnings taxed at 15% or to be taken out of superannuation system completely if members wish to do so.

For example, Asha had accumulated a superannuation balance of $2.2 million. She can start an account-based pension with a maximum of $1.6 of her balance. The remaining $600,000 will have to remain in an accumulation phase or be taken out as a lump sum.

Further, suppose that she transferred a maximum $1.6 million amount of her balance into the pension phase and commenced an account-based pension. This balance was very well invested and after taking the required minimum pension, investment earnings for the financial year were $200,000. This brings Asha’s pension phase balance to $1.8 million solely because of the investment earnings. This is fine because subsequent earnings on pension phase balances are not affected by the $1.6 million cap.

Members already in the retirement phase with balances above $1.6 million will be required to reduce their balance to $1.6 million by 1 July 2017. Excess balances may be converted to superannuation accumulation phase accounts.

Transferred amounts exceeding the $1.6 million cap (including earnings on these excess transferred amounts) will be taxed, similar to the tax treatment that applies to excess non-concessional contributions.

The amount of cap space remaining for a member seeking to make more than one transfer into a retirement phase account will be determined by apportionment.

Commensurate treatment for members of defined benefit schemes will be achieved through changes to the tax arrangements for pension amounts over $100,000.

The Government will undertake consultation on the implementation of this measure.

 

GEM Capital Comment

This proposal will allow couples to have a combined pension balance of up to $3.2 million.  However, where most of a couples superannuation savings are in one spouses name the $500,000 lifetime non-concessional cap will restrict a couple's ability to equalise their benefits to take full advantage of the transfer balance cap.

The requirement for member's with balances already in excess of $1.6 million to either withdraw or transfer the amount in excess of the cap back to superannuation (accumulation phase) means that people with pension account balances in excess of $1.6 million have not been grandfathered from these changes.

In this case, this may also result in impacted memebers with Self Managed Super Funds or super wrap accounts disposing of assets prior to transferring back to accumulation so as to ensure any capital gains are crystalised while the assets are still in pension phase and exempt from tax.

 

 


Transition to Retirement Income Streams (TTR): removing the tax exemption and an ability to treat pensions as lump sums in certain circumstances

The Government will remove the tax exemption on earnings of assets supporting Transition to Retirement Income Streams (TTR) from 1 July 2017.

Currently, earnings on superannuation balances that support a TTR pension are exempt from income tax of 15% applicable to investment earnings in the accumulation phase.

The Government will also remove a rule that allows individuals to treat certain superannuation income stream payments as lump sums for tax purposes.

These measures are expected to remove the attractiveness of TTR pensions as a tax planning device.

 

GEM Capital Comment

Taxing earnings on TTR income streams significantly reduces the tax effectiveness of strategies such as TTR and salary sacrifice.  For clients aged 60 or over, TTR strategies may still be worthwhile as pension payments are tax free and allow tax effective salary sacrifice contributions.  However for clients under age 60, the tax benefits are minimal.

The taxation of earnings in pension phase will only apply to "Transition to Retirement' income streams where the client has reached preservation age but not yet retired.  Presumably income streams where the client has met a full condition of release such as retirement will continue to have the earnings tax exemption apply.  Clients may look at arrangements involving ceasing a gainful employment arrangement over age 60 or ceasing work and declaring permanent retirement to meet the retirement condition of release.

From a superannuation fund perspective, administering the taxation of earnings in pension phase for transition to retirement pensions will add complexity.

 

 

Superannuation death benefits: removing the anti-detriment provision

From 1 July 2017, the anti-detriment provision will be removed.

The anti-detriment provision can effectively result in a refund of a member’s lifetime super contributions tax payments into an estate, where the beneficiary is the dependant (spouse, former spouse or child) of the member. According to the Government, currently this provision is inconsistently applied by super funds.

Removing the anti-detriment provision will better align the treatment of lump sum death benefits across all super funds and the treatment of bequests outside of super.

Lump sum death benefits to dependants will remain tax free.

 

 

 

This information is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. We strongly suggest that no person should act specifically on the basis of the information contained herein, but should obtain appropriate professional advice based upon their own personal circumstances including personal financial advice from a licensed financial adviser and legal advice. Fortnum Private Wealth Pty Ltd ABN 54 139 889 535 AFSL 357306

Friday, 29 April 2016 06:09

2016 Federal Budget - A Preview

Written by

Westpac expects the underlying budget deficit for 2016/17 which will be announced by the Federal Government on Budget night, May 3, will be $29bn. That is a near $5bn upgrade from the Government's December forecast, published in the Mid-Year Economic and Fiscal Outlook (MYEFO). Across the four years to 2018/19, the improvement is $17bn.

The economic environment is somewhat more favourable than anticipated. Real output growth has surprised to the high side in 2015/16. Commodity prices have also surprised, bouncing off historic lows, driving an upgrade of the terms of trade forecasts. In 2016/17 the terms of trade is set to swing from a major negative for national income to a small positive. Partially offsetting this: the currency has moved up from its lows; and general inflation pressures have weakened.

On the Government's forecasts for real GDP growth we expect just the one change, a 0.25% upgrade for 2015/16. That yields a profile of: 3.0%, 2.75%, 3.0% and 3.0%. The forecast for nominal GDP growth is upgraded by 0.25% in both 2015/16 and 2016/17 but downgraded by 0.25% in 2017/18, giving a profile of: 3.0%, 4.75%, 4.75% and 5.25%.

The iron ore price is expected to be revised higher from US$39/t fob in MYEFO to US$50/t (fob) for 2016/17 and US$46/t (fob) beyond that. This adds an estimated $7.8bn over the 3 years to 2018/19.

The budget impact from the improved economic backdrop, together with prospects for the 2015/16 deficit to be $1bn smaller than expected on lower expenditures, is $4.5bn in 2016/17 and $3bn a year thereafter, we estimate.

We anticipate that the balance of new policy measures, including the drawing down of the contingency reserve, as occurred in the May 2015 Budget, will be neutral for the budget in 2016/17 and improve the budget position by $2bn in 2017/18, increasing to a $5bn contribution in 2018/19.

The 2016 Budget is to focus on competition, innovation, investment and infrastructure. There will be tax cuts to boost investment and activity, as occurred in the 2015 Budget, funded by revenue integrity measures. A new infrastructure delivery agency is to be created, with private sector involvement. Any potential impact of the new infrastructure agency on government borrowing is unclear and has not been incorporated in our figuring.

The budget returns to balance in 2019/20, which now rolls into the four year forward estimate period. That is one year earlier than expected in MYEFO.

Net debt peaks at 17.9% of GDP in 2017/18, which is below the 18.5% peak forecast in MYEFO. In dollar terms, net debt climbs to $330bn in 2018/19, some $17bn below that in MYEFO.

 

 

Bill Evans

Westpac Economics

 

 

Friday, 29 April 2016 02:38

Euro Refugee Crisis

Written by

The flow of refugees into Europe has been staggering.  The human side of this tragedy is horrible, but here we are only considering the economic implications of the European Refugee Crisis.

 

We recently spoke with Clay Smolinski (Portfolio Manager Platinum Asset Management) to ascertain what he thinks are the key risks of this situation from an investment perspective.

 

Here is a video of our conversation - and a transcript below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mark Draper: Here with Clay Smolinski from Platinum Asset Management and the Europeans have been through a lot really in the last decade and they’ve got plenty of coming up.

One of them has to do with the refugee crisis over there. So we just want to spend a couple of minutes looking at the investment aspects of the European refugee crisis. Can you just take us through your thinking on that?

Clay Smolinski: Yeah, absolutely. So the refugee crisis for me, the issue is – the risk of it is that it’s another challenge that the political will of the European Union needs to face.

For me the crisis alone probably wouldn’t be a huge deal for the union but the issue is that it comes on top of a lot of the problems, those individual – the union of countries has had to face over the last few years.

So we think about the union. Through the sovereign crisis, they got through the major battle, which was the economic battle needing to cut the budget deficits, needing to where – you know, that higher unemployment that that caused. From the economic perspective, we can fairly definitively point that that battle has been won. The economy is now recovering but that has left that political will far weaker.

Since then we’ve seen that in subsequent elections, more radical left or right wing parties have been voted in. Examples of this would be Podemos in Spain or Syriza in Greece. We now have major members like the UK going to referendum on deciding whether it’s an exit or not and now we have the refugee crisis and immigration is always a very politically-charged issue and it’s clear that the member countries have differed in their views on how to exit, on how to handle it. That just creates – it’s another issue. It’s another reason for people to get upset, the voting populous and maybe vote for an exit.

What is interesting for us as well and is a bit of mitigant to that is how Germany is – has behaved through this and certainly through the sovereign crisis, the response to that crisis was very much dictated by Germany and that has forced a lot of the other member countries to go through a lot of pain.

Now with the refugee crisis, they’ve really stepped to the fore and said, “We’re going to do more than our fair share to handle this. We’re going to take a lot of these people on to our soil. We’re going to provide additional funding to the others to work through this,” and I think it’s their way of standing up and saying, “Look, we know you’ve done your part and now it’s our time to really give back and to show solidarity in the union.”

Mark Draper: So a major risk here would seem political for that in terms of the uprising of hard left or hard right – well, probably hard right in this situation.

Clay Smolinski: It’s very hard to factor that back into a definitive investment decision but it’s certainly something that we need to keep in mind and often when you compare the European market to the US market, the European market does trade at a valuation discount. But I think at least some of that discount is warranted given the – I guess the more uncertain political outlook for that region.

Mark Draper: So be alert, but not alarmed at the moment. It’s a work in progress.

Clay Smolinski: That’s how we’re viewing it.

Mark Draper: Thanks for your time Clay.

Clay Smolinski: You’re welcome

Thursday, 28 April 2016 23:21

China - Hard or Soft Landing?

Written by

The Chinese economy is critically important to Australia as one of our key trading partners.  It used to be said that if America got the 'sniffles' Australia gets pneumonia, now it can be said if China has a headache, Australia develops a tumour.

So with China making headlines in recent months, we asked Clay Smolinski (Portfolio Manager - Platinum Asset Management) whether he believes the Chinese economy is heading for a Hard or Soft Landing?  (note definition of Hard Landing is "An economic state wherein the economy is slowing down sharply or is tipped into outright recession after a period of rapid growth, due to government attempts to rein in inflation")

We bring you the 3 minute video of our conversation below, or alternatively you can read the transcript.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mark Draper: Here with Clay Smolinski, Portfolio Manager at Platinum Asset Management. Thanks for joining us Clay.

Clay Smolinski: You’re welcome, Mark.

Mark Draper: Let’s talk about China. Hard or soft landing economically?

Clay Smolinski: Certainly. I think when answering the question when looking inside of China, evidence of the hard or soft landing is very much determined on what industry you’re looking at, at the time. So we take the heavy industries. So we’re talking about industries like steel or cement where there’s over-capacity. There is a clear hard landing going on.

So there has been a big fall-off in construction activity. The government is now planning forced closures of capacity in those industries. We’re talking about 1.5 million steel workers being laid off over the next 12 months. Times are very tough there. However, you look at other sectors of the economy and we’re talking about sectors such as air travel, ecommerce, healthcare. There’s no concept of a landing there. These sectors are in take-off mode, growing very strongly, creating a larger amount of new employment and that’s really where we’re focusing our attention and that’s really where our investments are today in China at Platinum. We’re focusing on those consumer and service-focused industries.

Then the question is when we put those two together, what are we seeing on a broad basis? And what we see is – we look at the leading indicators. What we see is that while growth has slowed, the economy certainly isn’t in store mode.

So first, one leading indicator, a good one is wage growth. So two years ago, wage growth across China was growing at 10 percent per annum. Today that number is five percent per annum. A big step down but five percent per annum is still fairly healthy in our book.

Another interesting indicator is housing prices. So you can forget about the stock market. The real investment class of this nation is residential and commercial property and house prices in China have actually been really strong over the last 18 months. We’re seeing very strong in tier one cities like Shanghai and Beijing but it’s also prices are rising in tier two and tier three cities.

Then finally we see the government and the government is increasingly becoming more – really need to take more measures to support growth. We see that through cuts through interest rates. But also there are a number of industries where a lot can still be done.

China is not a developed country yet by any standards. So we think about the investment that can go into things like healthcare, the investment that can go into environmental solutions. They have a large environmental problem. So these are areas where we can see stimulus that – and it will be stimulus that will be productive and good for society.

So when we put all that together, it feels to us that the economy has stabilised and we’re very much in the soft landing camp for now.

Mark Draper: That’s great. Thanks for your update Clay. I appreciate it.

Clay Smolinski: You’re welcome.

Since Motor Registration stickers were no longer issued, the chances of forgetting to pay your car's registration have risen considerably.

Most people would focus their mind on the $400 fine that applies in South Australia for driving an unregistered vehicle ($800 in Victoria), and if that was the only downside for not paying your car registration, this article would end here.

The harsh reality though is that part of the cost of motor registration is provision of third party person insurance, which covers personal injuries resulting from motor vehicle accidents.  One of the most notorious motor accident personal injury claims involved the late actor Jon Blake who was awarded nearly $8m following a car accident that left his severely disabled.  The risk of driving an unregistered car is that in the event of an accident, you may be liable to pay insurance costs that would otherwise be paid by the compulsory third party person insurance - which could result in bankruptcy for you.

To help motorists, the South Australian Government has introduced a smart phone app - called EzyReg.

 

EzyReg allows motorists to check when their registration is due and also add a calendar reminder to their smart phone.  Payments can also be made on this app.

Finally - monthly payments for motor registration is now available, which can further reduce the risk of missing an annual car registration bill.

A $400 fine is painful enough if you forget to register your car - but the real risk lies with the compulsory insurance cover.

Thursday, 21 April 2016 02:47

Sustained Sluggishness

Written by

In this edition of IML (Investors Mutual) Market Musings, Hugh Giddy, IML’s Head of Research and Senior Portfolio Manager, reflects on the current state of global growth & indebtedness in the years since the GFC. Musing on the various measures taken by central banks, governments and public companies.  He explains some of the headwinds that the world faces that investors should be mindful of when setting their expectations in a low growth, high debt environment.

 

Here is the start of the report -

"In December the US Federal Reserve finally raised interest rates by a miniscule 25 basis points after six years of effectively zero rates. It has surprised almost everyone, not least of all the Federal Reserve, how sluggish the recovery from 2008’s Global Financial Crisis has been. Over that period economists have continuously forecast growth levels more reminiscent of previous recoveries and steadily had to cut those forecasts as actual events unfolded.


The authorities have tried many different approaches to stimulate growth, including punitively low interest rates for savers (in an attempt to make borrowing even more attractive), and in some European countries both short and long rates are now negative. Japan has just joined the club of central banks charging depositors to store their money in the banking system by lowering rates 1below zero. This can hardly be popular amongst Japan’s large population of retirees who would be hoping to get a positive return on their savings.

Quantitative easing (QE) has been tried repeatedly without leading to any useful real economic benefit – inflation remains low (higher inflation encourages people to spend rather than watch the real value of their savings erode), credit growth is anaemic despite low interest rates and growth has barely budged. Japan continues to experience swings in and out of recession despite aggressive monetary easing and money printing through QE. Indeed one could argue that the flailing efforts of monetary authorities to stimulate economies has actually been harmful in that the only noticeable effect has been a sharp rise in financial asset prices – with strong rises in selected share prices and indices, probable property bubbles, particularly in commodity exporting countries such as Canada and Australia, and very low spreads for high yield debt, i.e. very high risk debt, - until recently. The surge in these financial assets has distorted the pricing mechanism, and bubbles inevitably end in a bust."

 

Click on the icon below to download the full report.

Also - Hugh Giddy, the author of this report appeared recently on Sky Business with Paul Switzer in the "Switzer Report" - he discusses the themes that are outlined in the report.  You can watch this video here in addition to reading the report.

 

 

Friday, 15 April 2016 00:45

Apple in focus - Magellan buys a stake

Written by

One of Australia's most successful investors, Magellan Financial Group, has recently built a stake in Apple.

Here is the investment case behind this purchase - makes for an interesting read:

Apple is amongst the largest companies in the world. The company enjoys strong brand recognition globally and extensive market penetration for its flagship products, most notably the iPhone. While speculation around the success of Apple Watch, Apple TV, iPad, or even the likelihood of an Apple Car often captures headlines, we estimate that iPhone and iPhone-related services represented around 70% of Apple’s revenue and 80% of Apple’s gross margin in FY15. Despite its relatively high price, there is strong demand for the iPhone in both developed and emerging markets, with China now contributing 24% of Apple’s total revenue.

Apple’s growth has been driven through its position as a consumer hardware vendor. There are few, if any, examples of consumer hardware vendors which have endured over the long term as the products have typically commoditised over time. However, having built a powerful, enduring ecosystem, we view Apple today as a leading mobile platform and services company with sales of its devices reflecting effectively a “subscription” payment to access its platform and services.
Apple displays several attractive investment characteristics which support our longer term outlook for the company.

To download the rest of the report - click on the icon below (note the report also contains financial market commentary for March 2016 quarter)

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Wednesday, 30 March 2016 22:48

State tax competition - issues for South Australia

Written by

Helen Hodgson, Curtin University

Australia’s federal government initiated two major reform processes after the last election: a tax reform process and reform of the Federation. Prime Minister Malcolm Turnbull’s plan to hand income taxing powers to the states sits at the intersection of the two.

Under the Constitution, the states already have the right to levy income taxes. They effectively conceded this power to the Commonwealth after the Uniform Tax Cases, in wartime 1942 and affirmed in 1957. Both held that the Commonwealth use of the grants power was valid.

The Turnbull proposal is based around the Federal Government cutting income tax rates, then allowing the states to raise income tax directly from residents of that state.

The first challenge is the administration of such a proposal. The Commonwealth took over the collection of state income taxes in 1923 when the states agreed to the national collection of income tax. This led to the introduction of the Income Tax Assessment Act 1936, which ensured income tax laws were applied uniformly across Australia.

Turnbull has said the Commonwealth would continue to collect the tax for the states to avoid compliance costs. The Coalition government has campaigned against red tape, implementing a range of initiatives to reduce overlapping reporting requirements. These include the single touch payroll system that allows employers to report income tax and superannuation obligations in real time. The tax receipts that were issued to accompany tax assessments in the 2015 year would presumably be modified to show the share that was levied by the state.

The biggest challenge that would emerge is if states chose to exercise the right to increase or decrease their income tax rates. Accountability is one of the reasons being put forward for the proposal, on the basis that if the tax is more transparently related to services delivered by the state, the state government will use those taxes more wisely.

However tax competition can also lead to a race to the bottom: if one state lowers its taxes, other states are likely to follow.

Uniformity dominates

If tax competition results in lower income taxes in one state than another, interstate migration could increase, putting more pressure on the states that have not reduced their income tax rates. We have seen the problems that national governments are encountering regarding the appropriate jurisdiction to levy taxes: it can be expected that similar issues would emerge between the states, requiring a range of residency tests to attribute the residency of itinerant or technology-based workers.

Increasing migration between states would put pressure on state governments to reduce their own tax rates. Recent history shows that when the Queensland government reduced state taxes and abolished death duties in the late 1970s all other states and the Federal Government followed. A general lowering of tax rates would defeat the stated intention of allowing states to raise additional funding for health and education.

It would not be surprising to see mobile workers relocating to low tax states, while people more reliant on good health and education services, who may be at a stage in their life when they do not pay tax, would remain in states with better services.

Recent tax policy initiatives in Australia have focused on tax harmonisation as an antidote to tax competition. For example, since 2007 the states have implemented a harmonisation agenda to ensure that the administration of payroll tax is consistent across the country: however it does not extend to rates and thresholds.

There is also a question over what is meant by accountability: is it code for cost shifting? The Prime Minister has already acknowledged that states such as South Australia and Tasmania, which have a weak economic base, would have to be protected. Does this mean that if other states experienced a downturn in economic conditions they could also apply for assistance?

In his announcement the Prime Minister referred to this as the most significant change since World War II. History shows that it has been tried before: in 1978 the Fraser government introduced legislation that allowed the states to levy income tax. It did differ in the detail, but allowed states to impose surcharges or allow rebates. This legislation remained in force for 21 years without being applied by any states, partly due to changes in the political and economic environment.

As it stands the reaction from the premiers on the current proposal has been lukewarm. It would seem that a GST style agreement would be advisable to ensure passage through all relevant parliaments.

While both the formal tax and federation reform processes appeared to have stalled, it seems the government is putting them firmly on the election agenda.

The Conversation

Helen Hodgson, Associate Professor, Curtin Law School. Curtin Business School, Curtin University

This article was originally published on The Conversation. Read the original article.

Wednesday, 30 March 2016 22:30

Oil Price rising to $70 per barrel

Written by

We recently met with Clay Smolinski, Portfolio Manager at Platinum Asset Management and discussed with him why they believe the oil price is likely to rise to $70 per barrel over the next couple of years.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Here is the transcript of the video too.

 

Mark Draper: Here with Clay Smolinski, Portfolio Manager of Platinum Asset Management. Thanks for joining us Clay. We’re talking about the oil price today, which has been smashed back from $100 a barrel recently over the last couple of years back to around $30, $40 a barrel as they’re today. How do you see it playing out from here?

Clay Smolinski: Certainly. So from here, we see a fairly realistic case of where the oil – where oil is on a path back to roughly $70 over an 18-month period. But let me quantify that. So first of all, why do we think the price is going up at all? And it’s simply because we see that supply and demand balance starting to tighten.

So we can go through some simple maths. So at the start of 2015 is when the oversupply in oil became very apparent and at that time, we had a global oversupply of about 2.5 million barrels a day. On top of that 2.5, we can add a million extra barrels of production coming from Iran. That it’s going to step up production after the US sanctions were lifted. So starting base, 3.5 million barrels of oversupply to work through.

We can now think, “Well, what has happened since then?” So from the demand side in 2015, demand did what you would expect. The price fell and people consumed more. So demand was actually strong and it grew by 1.5 million barrels in over 2015.

On the supply side, we saw the first effect of the big reduction in activity in the US shale-oil markets and US shale production fell by half a million barrels. So combining that, we can take 2 million barrels off that oversupply and that leaves us with 1.5 starting 2016 now.

So what do we expect? Well, the activity cuts in US shale have intensified and we think you will see at least another half a million barrels of production coming out of that market this year, probably more like 800,000 and then it comes down to what’s demand going to grow at this year.

We think demand should grow at least by say 700,000 barrels, somewhere between 700,000 and a million barrels a day and that’s being underpinned by additional oil consumption out of China. So China’s oil demand is still growing by say 400,000 barrels a year.

So you’re putting that together. You can quickly see how we move from heavy oversupply to a balanced market. Then the other question is, “Well, why $70? Why does that make sense?”

The way we look at all the framework is since 2009, so the last seven years, the world is now consuming six million barrels a day of oil more. So we’ve gone from 84 million barrels of consumption in 2009 to 92 million barrels today.

Where did that additional six million barrels of oil come from? Well, four of the six came from US shale alone. So the US was absolutely integral to meeting that additional demand. How did they do it? Well, they really ramped that industry up by using a lot of debt and issuing a lot of shares, raising a lot of equity. We think that game is up now.

The market is now looking at this industry and saying, well, you need to be able to fund yourself. Now, as we move into a situation where the US – where oil demand is growing again and the US is going to move us from a situation of falling production to needing to grow again, to meet that high demand, we can then work out, “Well, what price of oil do US shale producers need to have to be able to fund their existing operations and generate enough cash to be able to drill more wells?”

When we look at the cost base of that industry, it’s roughly $70 to $80 so that’s how – that’s our line in the sand for the oil price.

Mark Draper: Those are very valuable insights and it comes back to supply and demand like every other market and we really appreciate the in-depth view on that.

Clay Smolinski: Absolutely.