WWN#42 – Trump & Australia: Trade Agreements & Tariffs

POTUS - Steel and Aluminium Tariffs.jpg

Source: Reuters

What’s Been Happening?

In January 2017, US President Trump signed a presidential memorandum to withdraw the United States from the Trans-Pacific Partnership (TPP). Trump had previously argued that the agreement harms the U.S economy and the TPP was a “disaster done and pushed by special interests who want to rape our country”.

Despite their most influential country dropping out of the agreement, trade ministers from 11 remaining countries decided to press ahead in March this year, saying that they were showing resolve against protectionism through global trade. The new TPP deal covers Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. Altogether, the pact covers 500 million people who account for 13 percent of the global economy.

What Now?

Trump has alienated the United States from its allies and other countries further by declaring that he will impose levy penalties of 25 percent on steel and 10 percent on aluminium imports as part of his “America first” pitch for local jobs. Exemptions based on national security grounds and the economic relationships between various countries and the U.S will ideally be granted within the two week waiting period before the tariffs take effect. Neighbours Canada and Mexico have already been excluded by Trump as long as they negotiate a new North America Free Trade agreement.

On the other hand, China immediately threatened to curb imports of U.S soybeans in retaliation while the E.U has simply stated that they will react firmly with countermeasures to be proposed within days.

Following the announcement, Australia’s PM Malcolm Turnbull phoned President Trump and said “a good and very productive discussion” took place. It was verbally confirmed between the two that tariffs would not be imposed on Australian companies exporting steel and aluminium. Turnbull has said that he reminded the U.S President of the good trade and military relationship between and the US. 60 percent of Australia’s “warfighting assets” are derived from the US and thousands of U.S marines rotate through Darwin every year.

What’s Next?

There are concerns that the implementation of tariffs can launch a trade war that will hurt other industries under a tit-for-tat approach. House Speaker Paul Ryan hopes that Mr Trump would “consider the unintended consequences of this idea and look at other approaches before moving forward”.

Some business leaders suspect that the steel and aluminium moves are a prelude to an increasingly protectionist administration, with upcoming moves likely to target China who, according to the Commerce Department, sold $375 billion more goods and services in the United States than what it had ordered.

There is also no time limit on how long the tariffs can last. If Trump wants to change the tariffs or introduce exemptions, he can file follow-on orders. Although countries can file a complaint at the World Trade Organisation, it would take years to make and enforce a ruling against the U.S who will likely argue that tariffs should be allowed to protect national security.


WWN#38 – Same-Sex Marriage Legalised in Australia!

What’s Been Happening?

In May 2004, the Howard government expressly prohibited the legislation of same-sex marriage by introducing the Marriage Amendment Act in Parliament. The amendment specified that marriage, would be defined as a “union of a man and a woman to the exclusion of all others”.

Over the next decade or so, legislation was passed so that discrimination against same-sex couples in areas of tax, social security and health and adoption were gradually removed.

In August this year, a non-compulsory national postal survey (also known as plebiscite) was conducted in order to gauge whether people supported the notion of changing the law to allow same-sex couples to marry. Respondents were asked to mark one box – Yes or No on the survey form. 80% of total registered voters (16,006,180) returned the form with 61.6% voting Yes and 38.4% voting No. Having given the public a say, it was felt by most members of parliament (MPs) that the verdict must be reflected in law.

What Now? 

Australia has officially become the 26th country to legalise same-sex marriage after the Marriage Amendment (Definitions and Religious Freedoms) Bill was passed in the Senate last week and House of Representatives on the 7th of December. An overwhelming majority of MPs voted in favour of the Bill, with four voting No and around nine abstained.

The new law changes the definition of marriage in the Marriage Act by removing the words “a man and a woman” and replacing them with “the union of 2 people”. This was the minimum required reform to enable same-sex marriage.

When the vote was declared on the floor of the House, the public gallery exploded into cheers and applause and eventually burst into a rendition of the song, “I am, you are, we are Australian”. Prime Minister Malcolm Turnbull was equally jubilant as he declared, “Australia has done it. What a day for love, for equality, for respect. This has been a great, unifying day in our history.”

Malcolm Turnbull SSM.jpg

What’s Next?

It is certainly cause for celebration that Australia has finally embraced marriage equality. Thousands of Australians who married in overseas jurisdictions will have their vows recognised under Australian law and the first same-sex weddings will be able to occur from January 9, 2018. However, it is not the end of the road when it comes to law reform.

There are still other issues that require attention and discussion which continue to affect same-sex people:

  • Birth certificates that accurately reflect a child’s family structure (e.g. four parents)
  • Controversial conversion therapies that attempt to “cure” a person’s same sex attraction
  • Protection of religious freedom or is it discrimination on the basis of sexual orientation?

WWN#30 – Chevron admits defeat in Landmark Tax Case

What’s Been Happening? A Multinational Oil Giant Makes A Loan to Itself

In June 2003, a $2.5 billion credit facility was agreed between Chevron Australia and a U.S. subsidiary called Chevron Funding Corporation. Under the terms of the loan, CFC borrowed at 1.2 percent in the U.S. but on-lent the money at 9 percent which led to $1.1 billion in profits for CFC between 2004 and 2008. The profits were not taxed in either Australia or United States.

The Australian Taxation Office (ATO) issued amended assessments for each of the 2004 to 2008 tax years which amounted to an extra A$340 million tax bill owed but Chevron objected to the ATO’s assessment. The assessments were made on the basis that the interest paid by the Australian company was greater than it would have been if it was a dealing made between two independent parties that had no relationship to each other. In September 2014, a trial began and was subsequently ruled in favour of the ATO by the Federal Court in October 2015.

Chevron appealed the Federal Court decision in April this year but lost the appeal with the full bench of the Federal Court reaffirming the ATO’s position. The appeal was dismissed although Chevron continued to pursue to the matter to the next level by appealing to the High Court.

What Now? Undisclosed settlement

Chevron has withdrawn its appeal to Australia’s High Court following an agreement reached with the Australian Taxation Office on the loan transfer pricing dispute. Both parties declined to comment on the size of the settlement. As a settlement has been reached for these tax years, it is likely that terms have been agreed for future years as well which would push the total tax paid by Chevron to over $1 billion. In fact, the ATO had already audited returns from 2008 to 2013 over the same issues with a total of $1.062 billion in dispute.

The ATO’s initial estimates are that the Chevron decision will bring in more than $10 billion dolalrs of additional revenue over the next 10 years in relation to transfer pricing of related party financing.

What’s Next? Case Set As A Precedent, More targets for the ATO

The decision has direct implications for a number of cases the ATO is currently pursuing in relation to related party loans as well as indirect implications for other transfer pricing cases. ATO figures for 2014-15 reveal that Australian arms of multinationals had $420 billion in related party borrowings, meaning billions of dollars in interest payments could be subject to challenge and increasing scrutiny by the ATO. The receipt of funds from this case is a much needed windfall for the Australian government who holds over $700 billion in debt.

KPMG tax partner Grant Wardell-Johnson further commented that the case has meant that companies could no longer say that the subsidiary is completely independent of its parent. A transaction between related parties needs to be carefully considered to ensure that the transaction is dealt at arm’s length.




Economic Risks for Australia and the World

The Federal Budget & Australia

  • A key underlying risk to the recent budget is the sustainability of the government’s revenue base.
  • The capacity to raise revenue is undermined by one such trend of the composition of growth away from wages and towards corporate profits.
  • The government collects 41% of its revenue from personal income tax and is the largest contributor to government revenue. This can be compared with the average 24% tax across wealthy countries.
  • Maintaining the path to surplus which is expected to be achieved by 2021 will require a disciplined approach to expenditure.
  • The level of public debt will need to be monitored closely as well to ensure that Australia does not “fall behind with an unsustainable and uncompetitive tax system” – John Fraser. It was only in the last few weeks that ratings agency Standard and Poor’s affirmed Australia’s AAA credit rating in response to the Federal budget although it noted that the government’s strong budget condition continues to deteriorate due to numerous years of fiscal deficits.
Source: John Fraser, Secretary to the Australian Treasury

Global Outlook – Risks

  • North Korea’s nuclear aspirations and tensions with South Korea and US is currently the main geopolitical issue and incredibly problematic for the United States government due to lack of viable solutions.
  • China’s main risk would be a financial crisis and the collapse of the renminbi. These risks are low but it is expected that there will be a continued economic slowdown. This is unlikely to materially affect the US as they are in a trade deficit with China (imports > exports) and therefore don’t depend on them as much as other countries. By comparison, Australia is in a trade surplus with China (exports > imports).
  • Europe continues to be in a state of political instability, where Britain, Germany and Italy will be going to the polls in the next 12 months. A key risk would be the break-up of the Eurozone, with other nations following Britain’s example of voting to leave the EU. The probability of this happening is very low as these nations are anticipated to steer away from doing so until they see what will actually happen with the UK economy. For others in the EU, it is certainly not an option without adverse consequences. Countries looking to leave the EU will need to re-domicile their assets and liabilities into a currency that is likely to devalue and dramatically reduce the wealth of its citizens.
Source: Hamish Douglass – Chief Executive Officer and Chief Investment Officer, Magellan Financial Group
*Attended the Stockbrokers and Financial Advisers Association Conference (SAFAA) 2017

WWN #18 – The Not-So Super Saver Scheme

What’s been happening? The First Attempt

Labour Party’s First Home Saver Account (FHSA) was a 2007 election policy of the Australian Labour Party. It offered benefits such as a variable interest rate, a tax rate of 15% and tax-free withdrawal.

The scheme only lasted until 2014 when the Federal Government decided to abolish it due to the slow uptake by the public. The problem with the scheme was that in order to close the account and access the funds, you had abide by the cumbersome “four year rule” – deposit at least $1,000 every year into the account for at least four financial years. At the time, there was 47,400 accounts with an average balance of about $12,800 each. It was expected that more than 750,000 accounts would be opened but this was never realised.

What Now? Let’s Try Again

On Tuesday night, the 2017 Federal Budget was released and the First Home Super Saver Scheme (FHSSS) was announced. The scheme allows people to put away a maximum of $15,000 per year into their super before tax, up to a total of $30,000.

Contributions paid into super this way will be taxed at just 15% instead of the usual marginal income tax rates (e.g. 32.5% for someone earning over $37,000). Any returns generated on the funds while they are held in super will also be taxed at the low rate of 15%.

The potential tax saving is reduced if you earn more than $250,000 per year where the tax rate rises from 15% to 30%.Earnings can be withdrawn along with the contributions when home is purchased. The withdrawal will be taxed at the individual’s marginal tax rate less 30%. This measure is estimated to have a cost to revenue of $250 million to the government.

Mortgage Choice CEO John Flavell remains sceptical that this scheme will succeed based on past experiences of the similar FHSA scheme. The new scheme has some great incentives but its main failing is that it doesn’t allow home buyers to save a big enough deposit. The ever-rising prices in the nation’s capitals means that a $30,000 deposit is not going to enough. According to Superfund Partners director Mark Beveridge, the average person would only save about $2500 extra a year. If you are a couple and save the maximum amount over two years, the total benefit is still less than $10,000.

On the other hand, some prospective buyers have backed the idea on the basis that it was better than another suggestion to allow first home owners to directly draw out funds from their existing super for a deposit.

For an indication of the potential benefit of the FHSSS to you, the government has prepared a handy estimator – click here.

First Home Super Saver Scheme (FHSSS) – Key Facts
Maximum contribution amount $15,000/year reaching a total of $30,000
Maximum term Unrestricted
Contribution Tax Rate on Deposits and Related Earnings 15%
Effective Start Date (Contributions) July 1, 2017
Effective Start Date (Withdrawals) July 1, 2018
Withdrawal Tax Rate Marginal Income Tax Rate Less 30%

What’s Next?

The FHSSS appears to be one of many “crowd-pleasers” in the budget – politically friendly measures that are not particularly meaningful.

As noted earlier, initial feedback is critical of the new scheme’s success and the potential benefit in tax savings may not be significant enough to convince many prospective first home buyers to implement the scheme. It is also argued that putting more money into borrowers’ pockets without increasing supply will likely to add to home price pressures.

There is a great deal of uncertainty ahead as any changes outlined in the Federal Budget (including this measure) must be passed by both the House of Representatives which is controlled by the government and the Senate. This means that any proposed changes may not necessarily become law.


WWN #17 – Telstra: Big win in Mobile after a Big Loss

What’s Been Happening?

In the 2nd half of 2016, the Australian Competition and Consumer Commission (ACCC) asked for feedback on a discussion paper about declaring mobile services, which would force Telstra to let competitors’ customers onto its network in regional areas. The purpose behind the discussion paper was to determine if increased competition between telecommunication companies (telcos) could deliver better coverage to people across the country.

There were approximately 120 submissions made in response and most supported the status quo out of fear that Telstra’s coverage would shrink if it could not operate an exclusive network.

Telstra and Optus were opposed to the changes as both have been investing heavily in mobile infrastructure and argued that it was fundamentally at odds with the principle of “infrastructure competition”. On the other hand, Vodafone submitted hundreds of pages in favour of the declaration as it sought to bring an end to Telstra’s market dominance.

What Now?

The ACCC has released a draft decision today proposing that it will not declare a wholesale domestic mobile roaming service. In other words, it will not force Telstra and Optus to give other telcos access to use their infrastructure and roam on their network.

It has found that mobile roaming would not necessarily reduce Telstra’s retail mobile prices for users in regional, rural and remote areas and “could well result in overall higher prices if other service providers raise their retail prices to reflect the cost of roaming access prices, for example”. – Media Release by ACCC.

Telstra welcomed the draft decision with CEO Andrew Penn saying that it was the correct decision for the people of Australia as it would continue to encourage telecommunications investments and competition. Once the decision is confirmed, he said that the 4G coverage will be expanded to reach 99% of the population by later this year.

Vodafone issued a strongly worded statement to voice their disagreement with the decision, where “too many Australians will continue to be held hostage to Telstra” and was disappointed that a “scare campaign with no facts or substance has succeeded”.

The news has sent Telstra shares soaring by 4-5% to around $4.42 which was a much needed boost to its share price after falling by more than 7.5% in mid-April following its rival TPG’s announcement that it plans to build its own mobile network after having paid $AUD 1.26 billion for mobile spectrum.

Telstra Share Price 5th May.png

Credits: Yahoo Finance Charts, Telstra’s Share Price between April 12 and May 5 2017


What’s Next?

The ACCC has invited submissions on the draft decision until 2 June 2017 after which it is expected to hand down its final decision.



WWN #13 – Deflating the Housing Bubble: APRA Announces New Mortgage Rules

500px Photo ID: 129251911 - Little paper house flying with some helium balloons.What’s been happening? 

In December 2014, the original round of macro-prudential policies were introduced by the Australian Prudential Regulatory Authority (APRA) amid concerns that the rise in lending was due to speculators. APRA aimed to limit investment lending growth to 10% through measures such as loan affordability tests which assess the borrowers’ ability to service their loans. In these tests, it was recommended that an interest rate buffer of minimum 2% above the loan product rate and a floor lending rate of 7% be incorporated. It doesn’t seem to have worked well however, as investors currently account for 50.2% of new home loans.

What Now?

In a move to tighten lending practices, APRA announced new macro-prudential regulations this Friday. Currently, interest-only loans account for 40% of total lending which is higher than levels last seen in 2008 (30%).

APRA’s new rules require banks to:

  • Limit the flow of interest-only lending to 30% of new mortgage lending for both investors and owner occupiers. Interest-only lending must have an LVR of above 80% and must ensure there is a strong scrutiny and justification for any instances of interest-only lending at an LVR of above 90%
  • Retain the current 10% growth cap on investor mortgage lending but must ensure that they remain “comfortably below” the benchmark.  The wording used provides considerable discretion to the regulator.

The magnitude of the changes was smaller than expected by analysts, including Bell Potter banking analyst TS Lim. The market was expecting the 10% cap on investment loans to be reduced.

APRA Chairman Wayne Byres also warned that there will be additional requirements imposed on banks when the proportion of new lending on interest-only terms exceeds 30% of total new mortgage lending.

What’s Next?

From the new rules, it appears that APRA is trying to improve the quality of mortgage lending rather than restricting supply too aggressively. However, credit growth will slow nonetheless, especially in investment lending and interest-only home loans. Investment lending growth is currently above 10% and repayments are slow so lending to investors will need to slow considerably before the 10% cap can be attained.

For two of the big banks Commonwealth Bank and Westpac, they have double the number of interest only loans compared to their competitors ANZ and NAB which would mean that they are likely to have more difficulty in meeting the new requirements.

In a viewpoint that is implicitly shared by APRA, Treasurer Scott Morrison pointed out that it is no longer a question of housing affordability but “also an issue about household debt… and the need to make sure that it is well managed from a financial stability point of view”.  And so the housing bubble continues…