G20 – Did I do that? Thursday, 24th Jul 2013
After initiating the decimation of the Fringe Benefits Tax (FBT) regime in Australia, Mr Chris Bowen, our current Treasurer, raced off to Moscow to attend the G20 Finance Ministers Meeting over last weekend.
These meetings are the forerunners of the G20 Leaders Meetings which are held some 3 months later. Supposedly those who know most about finance meet before their leaders gather to strut their egos at their meeting.
Figure 1. Who FBTed Up? Source: Reuters/Grigory Dukor
So what happened in Moscow over the weekend? Not much new was announced and the batch of communiqués included the following statements:
- “The global economy remains too weak and its recovery is still fragile and uneven. Unemployment remains excessively high in many countries… Strengthening growth and creating jobs remain our priority, and we are fully committed to taking decisive actions to return to a robust, job-rich growth path”;
- To make that growth possible, the Meeting agreed to develop an action plan to be presented at the summit of the G20 leaders in September. The plan will include “a comprehensive series of structural reforms that will increase productivity, labour force participation and employment,”
- Among such reforms is a major tax initiative proposed by the Organization for Economic Cooperation and Development and “aimed at increasing the transparency of taxation systems globally”; and
- “We remain mindful of the risks and unintended negative side effects of extended periods of monetary easing… Future changes to monetary policy settings will continue to be carefully calibrated and clearly communicated.”
The communiqués were thus full of motherhood statements (and these were made before the royal baby arrived on Tuesday night!). However, on scanning the various press reviews it seems the important decisions were that international tax avoidance is to be targeted and that austerity is no longer regarded as an appropriate policy response to the European downturn. Also the G20 noted that Europe needs to move forward with a banking union because its banks remain undercapitalised and capital is flowing away from Europe.
Possibly the most important point was regarding the communication of monetary policy settings by Central Banks: the markets will increasingly be coaxed along by forward looking statements. For instance there will be clear statements regarding interest rate settings and Quantitative Easing programs. There should no longer be economic policy surprises which is the acknowledged cause of unnecessary volatility in markets, thereby hindering recovery.
On reflection, these are interesting developments for the world economic stage and so we ask the obvious question from the Australian perspective – Why does our government continue to change economic policies which are in sharp contrast to those previously stated?
Back to Australia’s crumbling budget
After the meeting, our Treasurer began the long journey home and he no doubt was secretly dreading the requirement to meet with Australia’s car lease finance and automotive industries. He would surely now realise that the government’s decision to change the FBT arrangements based on the advice of recommendations of his department (Treasury), could go down as one of the most destructive policy changes in terms of employment in Australia’s history.
The decision to change the calculation of FBT on employer supplied cars or novated leases was done with such haste and with so little concern for the human or economic consequences, that it can only be explained by an urgent need to raise tax revenue. The argument that the Government is correcting an unfair tax break is simply not supported by the Government’s lack of consultation or communication. It is in complete contrast to previous policy statements and the recommendations of the Henry Tax Review. Thus it appears that the unseemly rush suggests something is rotten with the Federal Budget.
How bad has the Federal Budget become?
Did the world’s greatest Treasurer leave the new boy with a budget pup? Well, he clearly did because the economic outlook for Australia continues to be clouded by declining commodity prices, higher unemployment, weak credit growth and poor consumer sentiment. In fact, there is very little that is currently happening in Australia to suggest anything other than that the assumptions surrounding tax collections are already way too optimistic. Indeed we will get a glimpse of this in the coming five weeks when it is likely that Australian listed companies, excluding the banks, will declare a drop in reported earnings for the last financial year. Further, should an election be called the Government will have to present a pre-election budget outlook update. No one should doubt that the immediate implementation of the FBT changes with its unsubstantiated assumptions was required to present a budget that does not look like a crumbling mess.
If the revenue side was not bad enough, we now have the Government committing unknown amounts to Papua New Guinea to take re-directed asylum seekers. Whilst the Prime Minister appears to have done well to convince Indonesia to stop issuing visas on arrival to likely asylum seekers – one can only wonder what our previous Prime Minister was doing? Perhaps a more logical response to this issue would be a request from Australia to Indonesia to make it a serious offence, equivalent to manslaughter, to arrange or be involved in people smuggling by boat. When the ABC can find and interview “people smugglers” it makes one wonder why our intelligence agencies are apparently so ineffective in combating this scourge.
More significant for the forward estimates of the budget, the Government has brought forward (to July 2014) the replacement of the Carbon Tax with an Emissions Trading Scheme (ETS). This decision creates a black hole on tax collection forecasts that were based on a new tax created a mere one year ago. The Carbon Tax will soon disappear on 1 July 2014 but the government has spent the money that it will not collect and it will not reverse this expenditure prior to an election.
In essence, the Government has committed to maintaining financial assistance to low income earners to offset the cost of living increases from the Carbon Tax that will soon disappear. The net result of all of this? The Australian Federal Budget has been turned upside down from what was proposed just 3 months ago. The decision to create a rule change with FBT calculations merely involves taking a tax concession from some to give a tax concession to others for something that will not happen!
As for the ETS scheme based on European pricing, it is proposed that Australia become connected to a carbon market that has been manipulated by European Governments and suppressed by a major recession. Frankly, the European price of carbon is a lottery and gives no basis for certainty to Australian business as to what the sustainable cost of energy is or will be. Clearly the European Union issued too many carbon permits in its efforts to protect European industry during the deepest recession since the Second World War. The affirmative actions of European Governments are in stark contrast to the chaotic policy settings of our Government. Indeed the carbon policy settings which encapsulate a European ETS by the current government are incomprehensible.
FBT, McMillan Shakespeare and the Automotive Industry
Unfortunately, the dramatic policy shift by the Government concerning the calculation of FBT on employer provided cars or novated leases will have enormous consequences for the finance and automotive industries. One of our favoured stocks, McMillan Shakespeare Limited (ASX:MMS), is caught by this policy shift because it is a major provider of both novated leases and car finance leases. MMS provides these services to a range of enterprises that include government departments and agencies. In fact, it has a large business providing salary packaging services to State Governments with a focus on employees in the public health system. It is quite incredible to think that the Federal Government has, by declaration, implemented a policy that will see the costs of the public health system increase. The result will be that everyone will pay more for services because employees will justifiably seek compensation or hospitals will seek cost recompense.
There are clearly many arguments surrounding the provision of salary packaging arrangements for employees. Those most vocally against it are mainly people who cannot access these arrangements. “If I cannot have it then why should someone else get it?” Those who support it are mainly the beneficiaries of or the operators in the provision of these legal tax arrangements. However, what is clear is that salary packaging and FBT arrangements are ingrained in employment arrangements across Australia. For a Labor Government to unilaterally change the employment terms of middle class workers, without notice, sadly shows that the Labor Party needs to do much more than go back to its roots in Balmain for a Caucus Meeting. It has to be reborn.
For the record, we can record the facts that surround the FBT arrangements concerning the last 100,000 employer provided leased cars in Australia by members of the salary packaging industry:
- 28% were taken by charities or public health employees, 33% by state and government employees, 21% by police and teachers, leaving just 18% by the private sector;
- The average price of a salary packaged car was $34,500;
- Just 5% of cars were BMW, Mercedes and Audi models;
- 35% were locally made cars by Holden, Ford and Toyota; and
- Over 70% of the employees earn less than $100,000.
Frankly, a sensible adjustment to FBT arrangements, without creating a log book jam, would have been to limit the concessions to salary earners under $100,000. Further, the 20% cost base formula could have been moved to say 30%, the FBT treatment could have been moved to favour fuel efficient vehicles and the cost of a vehicle could have been limited to under $30,000 to drive down the cost of cars.
If that had been done with a 3 year transition period, then a whole range of desirable outcomes could have been generated for Australian industry. Surely that is the appropriate role for a forward-thinking, rational and responsible government? How have we got it so wrong?
The Australian share market
Unfortunately the above policy developments and the haste in their implementation could do significant damage to the Australian economy and therefore depress the market. Whilst it is difficult to knock down the valuations and prices of Australian shares due to historically low bond and cash rates, it is undeniable that listed company earnings are under immense pressure. This Government’s actions are simply making the economic environment worse.
To exemplify this point, compare the frantic call by the former Prime Minister for a crisis meeting over the future of the Australian automotive industry in early June, with the disruptive FBT decision of the new Prime Minister in July. Those announcements are totally contradictory. The question is why?
Many of the decisions and their context suggest that Australia is being managed in and/or towards crisis. Many of the Government’s decisions seem totally contrary to their stated policy and the interests of Australian business. Investors, whether local or foreign, are investing in a period where the decisions of government are neither certain nor predictable. One consequence is that capital (and particularly foreign capital, which has a choice), will be attracted to other markets where political and policy backflips are not such regular occurrences.