Monday 18th February 2008 - 8:00 am

Foreign investment:Australia’s interests

by Alan Thornhill

China’s interest in blocking the proposed merger between BHP Billiton and Rio Tinto is well known.

It doesn’t want to see Australia’s iron ore trade dominated by a single big player.

But its decision to take a strategic stake in this take-over target raises new questions.

There is room for agreement.  The Australian government would probably not be too eager to see the nation’s iron ore market dominated by just one company, either. That’s not a good look, when we have to compete against Brazil, for customers, in this highly profitable trade.

Chinalco’s strategic stake in Rio, though, does raise issues of sovereignty for Australia.

Chinalco is a state owned arm of the Chinese government.

And while Australia’s relations with China are excellent, the seller’s interests are always different from those of the buyer.

Delicate issues raised by particular investment proposals these are traditionally examined by the Foreign Investment Review Board.

This time, though, it is arguable that the issues this raises are essentially political.

And, therefore, that these questions should be settled at a political level.

Besides, the FIRB, as the investment board is commonly known, has a history of approving virtually every proposal that comes before it.

FIRB is part of the Federal Treasury, which is a great supporter of foreign investment.

There is good reason for that.  Foreign investment drives the Australian economy.  It provides many jobs.

But, if the sovereignty arguments are found to be compelling, the Rudd government might be forced to set new rules. However reluctantly.

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Monday 18th February 2008 - 8:23 am

Sharp practices:take extra care

by Alan Thornhill

Smart operators are finding some creative ways to get around the inconveniences of the credit crunch.

So extra vigilance will be needed in the months ahead, to protect the value of clients’ savings.

The Australian newspaper exposed one such scheme on Saturday.

But there will be many more.

The scheme, detailed by the Australian, is essentially simple. Traders, such as hedge funds, “borrow” shares, for a fee, from superannuation funds.

They then borrow against those shares.

But what do they do with the money they raise that way?

They might, for example, borrow against blue chip stocks, to prop up any of the rapidly rising number of over-extended property trusts.

But those trusts could then fail, anyway.

So what happens then?

If the property trust takes the borrower down with it, the lender would have first call on the value of those share.

The superanuant, whose savings were meant to be protected by those good shares, would lose.

This is something that no well ordered civil society can tolerate.

Volatile times, like those we are enduring at present, do create opportunities, as well as risks.

And those opportunities should be explored.

It is equally true, though, that extra care is required in such times.

Monday 18th February 2008 - 6:31 am

Terminal conditions:the rules are set

by Alan Thornhill

The Federal government has set its rules for a new superannuation concession that it is offering terminally ill people.

The Minister for Superannuation and Corporate Law, Nick Sherry, made the announcement at the weekend.

“Under the previous early release rules, persons in this situation who continued working faced restrictions on the amount of superannuation they could access,” Senator Sherry said.

“The new condition of release will give persons with terminal medical conditions unrestricted access to their superannuation benefits,” he added.

Senator Sherry said this change complements the government’s related measure, contained in the Tax Laws Amendment (2008 Measures No.1) Bill 2008.

The government brought that bill into parliament on February 13.

It made superannuation tax free when it is paid to people suffering from terminal medical conditions.

Need to know more?

The details can be seen in the Superannuation Industry (Supervision) amendment regulations 2008 (No,1).

That is available on the Federal Register of Legislative Instruments website.  The address is www.comlaw.gov.au

Friday 15th February 2008 - 8:07 am

The staged tax cuts:round one

by Alan Thornhill

A bill the Federal Treasurer, Wayne Swan, yesterday brought into Federal parliament yesterday is meant to give effect to the first stage of the $31 billion worth of tax cuts, that Labor promised before the Federal elections in November.

The government had to act quickly on this, because the first tranche of the cuts is to be paid from July 1.

Its aim, ultimately, is to flatten Australia’s personal income tax system.

The government plans to do this by reducing the number of income tax rates from four to three.

That would mean a personal income tax scale of 15 per cent, 30 per cent and 40 per cent.

It would also include what Mr Swan called “a more generous low-income tax offset delivering an effective tax free threshold of $20,000 to low-income earners.”

“These further reforms will be implemented in due course as economic circumstances allow,” Mr Swan said.

Those words are worth marking.

His advisors are less than enthusiastic about the idea of pumping all that extra money into an already overheated economy.

Terror in the Treasury -and reserve in the Reserve bank – just about sums up the attitudes of the best and the brightest on the government’s panel of experts.

But a promise is a promise. And the government saw what happened to Paul Keating, when he tried to divert the second tranche of his famous L-A-W tax cuts, back in the early 1990s.

The tories well remember, too, the fuss they made about all that, in those dim, dark days. That matters now, too. The conservatives would expose themselves to ridicule, if they tried to delay the first stage of Labor’s promised tax cuts now, by arguing that they would be inflationary. That would not be practical, politically.

But the tax cuts could well prove to be inflationary, unless they are offset by very substantial cuts in government spending.

And Mr Swan appeared to have few doubts yesterday, as he introduced his bill.

He argued, forceably, that the tax cuts would counter inflation, by attracting more people, particularly women, back into the workforce.

Mr Swan has a point.

Labour shortages, in key areas, are indeed one of the prime drivers of inflation in Australia right now.

No -one doubts that.

Mr Swan said that from 1 July this year, the that the 15 per cent marginal tax rate will apply up to $34,000 of income.

That is an increase in the threshold of $4,000.

The low income tax offset would also be increased from $750 to $1,200.

“It will continue to phase out at 4c for every dollar of income above $30,000,” the Treasurer said.

“This means that those eligible for the full low-income tax offset will not incur a net income tax liability until their annual income exceeds $14,000.

“Importantly and also for the first time, from 1 July 2008, low-income earners will receive half the benefit of this offset through their regular pay, rather than receiving the total as a lump sum when their income tax returns are assessed,” Mr Swan said.

“This will ensure that they receive more timely tax relief in their take-home pay and will sharpen incentives to participate in the workforce.

“Further tax cuts will apply from 1 July 2009, including an increase in the 30 per cent marginal tax rate threshold, so that the 15 per cent marginal tax rate will apply up to $35,000 of income.

“In addition, the 40 per cent marginal tax rate will be reduced to 38 per cent.

“The low-income tax offset will be increased from $1,200 to $1,350 from 1 July 2009.

“This means that those eligible for the full low-income tax offset will not incur a net income tax liability until their annual income exceeds $15,000.

“From 1 July 2010, the threshold for the 30 per cent marginal tax rate will increase so that the 15 per cent marginal tax rate will apply up to $37,000 of income.

“In addition, the 38 per cent marginal tax rate will be reduced to 37 per cent.

“The low-income tax offset will also be increased from $1,350 to $1,500 from 1 July 2010.

“This means that those eligible for the full low-income tax offset will not incur a net tax liability until their annual income exceeds $16,000.”

Mr Swan said, too, that the changes would help many older Australians.
As a result of the increases in the low-income tax offset and the threshold for the 30 per cent tax rate, the income up to which senior Australians eligible for the senior Australians tax offset do not pay income tax will also increase.

“From 1 July 2008, senior Australians who are eligible for the senior Australians tax offset will not pay income tax until they reach an annual income of $28,867 for singles and $24,680 for each member of a couple.

“From 1 July 2009, these income levels will increase to $29,867 for singles and $25,680 for each member of a couple. From 1 July 2010, these income levels will increase further to $30,685 for singles and $26,680 for each member of a couple.”

Debate on the bill was adjourned.

Thursday 14th February 2008 - 9:42 am

Bankruptcies:clearing the mess

by Alan Thornhill

Insolvencies are always messy.

But they are particularly so, when those who go broke – and those they owe – live in different countries.

New legislation, that the government introduced into parliament yesterday, is meant to ease the trauma of cross border bankruptcies.

At least a little.

The Minister for Superannuation and Corporate Law, Senator Nick Sherry, said it would set international standards in place.

“The bill gives effect to the Model Law on Cross Border Insolvency developed by the United Nations Commission on International Trade Law.”

So you can relax now. That’s all fixed.

Perhaps.

More likely not.

But the proposed legislation should open doors, that have been firmly shut in the past.

How would it work?

Senator Sherry said the bill would:-

  • Encourage co-operation between courts and insolvency practitioners in different countries.
  • Clarify the rights of foreign creditors to participate in Australian insolvency procedures and
  • Assist co-ordination of international insolvency procedures.

All of that has to be good.

Senator Sherry also said, when introducing separate legislation, that the government will legislate to make lump sum superannuation payments tax free to people suffering from terminal medical conditions.

He said this would relieve some of the financial stress that these people and their families can encounter, when these circumstances arise.

Thursday 14th February 2008 - 9:51 am

Watching the watchdog

by Alan Thornhill

Any watchdog, guarding $3 trillion worth of Australian savings, will need more than just sharp teeth.

Proper supervision will also be required.

That, basically, is the aim of new legislation that the government introduced into Federal parliament yesterday.

It flows, partly, from a review of Australia’s prudential regulation after the spectacular collapse of the nation’s second biggest insurer, HIH, in 2001.

The Australian Prudential Regulation Authority (APRA) has sharp teeth. It can bite hard, if it sees banks, credit unions, building societies or insurance companies making what it believes are bad investments.

The laws, which give it those powers, were meant to protect the public from traumatic events, like the HIH collapse.

All investments, though, ultimately involve a measured assessment of risk and reward.

And the public could lose, too, if APRA’s orders were so tight, that they robbed investment fund managers of good opportunities.

No-one is suggesting that this has actually happened in Australia. At least not yet.

But the risk is there.

That’s why the Minister for Superannuation and Corporate Law, Senator Nick Sherry, introduced legislation, proposing a package of reforms, to allow better review of APRA decisions into parliament yesterday.

That package is highly technical.

But, essentially, it opens the door to court based reviews of APRA decisions.

If APRA takes a dislike to a particular investment manager, for example, and disqualifies that person from performing his normal work, there will be a right of appeal, in future.

Senator Sherry also said the new legislation would enhance flexibility and consistency, by streamlining APRA’s powers of direction.

His plans are set out in the Financial Sector Legislation Amendment (Review of Prudential Decisions Bill) 2008, which is now before parliament

Wednesday 13th February 2008 - 10:51 am

Rate rises hit consumer confidence

by Alan Thornhill

Rate rises are damaging consumer confidence.

The latest Westpac Melbourne Institute index of consumer confidence, compiled after this month’s rate rise, showed that, consumer confidence plunged 5.5 per cent this month.

And the bank’s chief economist, Alan Oster, said pessimists now outnumber optimists, for the first time since 2006.

“Consumer sentiment has fallen sharply following each of the RBA rate hikes from 2005-2007,” Mr Oster said.

Predictably, the confidence of people who have housing loans has been hit hard.

Consumer sentiment among these, mostly young, families fell by 6 per cent this month.

But older people are worried, too.

Confidence among the mostly older people, who own their own homes, tumbled by 11.3 per cent.

Earlier research, by the National Australia Bank, has already confirmed that business confidence, too, has been damaged, not only by the rate rises which have already
occurred, but also by the prospect of future rises.

The Reserve Bank, though, won’t be upset by these results.

It will see them as clear signs that its policies are working.

Wednesday 13th February 2008 - 6:43 am

Saying sorry:A historic declaration

by Alan Thornhill

Kevin Rudd’s apology, to stolen generations of Aborigines, is unprecedented in Australian political life.

He will deliver it, on behalf of the entire parliament, at 9am today.

Mr Rudd’s script, released late yesterday, shows that he will use the word “sorry” no less than three times.

That’s a word his predecessor, John Howard, never would, never could allow to escape his lips. “Regret” was the best Mr Howard could manage.

Rudd also invited an Aboriginal elder, Matilda House, to welcome members and their guests to the new session of parliament, yesterday. This was meant to set a precedent for future openings of Federal parliament.

Mrs House, now a grandmother, insists that she, personally, was not a member of the Stolen Generation. But a white mission manager did separate her from her family, against her parents’ will. He declared the then 12 year old Matilda, a cheeky and spirited child, to be uncontrollable.

She was sent to the Parramatta Industrial School, which she later described, succinctly, as a “detention centre.”

Barefoot, and dressed in a full length possum skin coat, Matilda reminded the dignitaries present at the formal opening that Canberra had been a meeting place, for her tribal people, for thousands of years.

In fact, that’s where the word, Canberra, comes from. It means “meeting place.”

Still spirited, after all these years, Matilda said that Australia’s $2.6 billion parliament “leaks, like all houses.”

Soft rain was falling on her, at the time, from a less than watertight skylight, high above.

The day before, attendants had put four plastic buckets, on the marble floor of the Members’ Hall, to collect the rain.

Unlike his predecessor, Gough Whitlam, Kevin Rudd is no orator.

But there is a distinct ring to the words he will use today, to say sorry.

“We apologise for the laws and policies of successive Parliaments and governments that have inflicted profound grief, suffering and loss on these, our fellow Australians,” he will say.

Although his apology to Aboriginal people will be profound, no offer of financial compensation will be attached.

But Kevin Rudd has warned that fixing the legacy of Aboriginal disadvantage will be expensive.

He also says, though, that he will be looking for a “reciprocity” from Aboriginal people. That is their active co-operation, with efforts to improve their living standards.

The apology will be broadcast on national television at 9am Eastern Standard Time, today. It should be worth watching.

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Profile

Alan Thornhill

Alan Thornhill is a parliamentary press gallery journalist.
Private Briefing is updated daily with Australian personal finance news, analysis, and commentary.

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