Raja Junankar

Weak inflation figures have been seized on as an example of the slowing Australian economy. However if we listen to the politicians it appears that the Australian economy is suffering from a major crisis of ballooning government debt and an impending crash. This is patently not the case – the way the economy has continued to grow shows Australia really is the miracle economy.

Most of the countries of the OECD are still suffering from the Global Financial Crisis – or as the Americans call it the Great Recession. However the Australian economy is still very healthy. Admittedly in the past few months, it appears that the Australian economy is finally slowing down as the resources boom comes to an end, however unlike most of the OECD countries, Australia did not have a recession, and indeed finances remained very healthy.

Indeed, much rhetoric from Canberra seems to ignore this. For example, if you look at the unemployment rate it increased slightly after the GFC, but it came down again. All the other countries had much higher unemployment rates than Australia in the post-2008 period. The period of record low unemployment in Australia for the past five years seems to be frequently ignored in discussions about the economy.

Looking at how well the Australian economy has fared over the past few years, compared to other countries, it appears to score very highly.

Looking at the debt to GDP ratios, Australia has the lowest ratio. Even Germany, the country that is imposing austerity on the eurozone countries, has higher debt ratios. And yet if you listen to some politicians they believe that Australia is in debt crisis – but actually, Australia is in a far better situation than pretty much every other country. Until the population start listening to some of the facts, rather than myths about the economy, the negative stories will dominate rather than the facts.

Honorary Professor Raja Junankar is from the Industrial Relations Research Centre at the Australian School of Business.

Dale Boccabella

If we needed another example of just how difficult meaningful and principled tax reform is in Australia, we got it recently in the reaction to the Government’s announcement that it would abolish the “statutory formula” method for valuing fringe benefits representing employer-provided cars. The reaction at times was hysterical.

Some of the claims were extreme and they are obviously calculated to put as much pressure on the Government to back down fully, or at least in part. These are the facts in regard to the relevant tax law.

Where an employer provides a car for the use of an employee, a fringe benefits tax liability might arise. There are two methods of valuing this type of car usage benefit. One is the “cost method” and the other is the“statutory formula” method.

The cost method works out the cost of operating the car for the year (for example, petrol, servicing, insurance). From there, the employer (with the employees help) establishes the percentage of private use (such as a weekend drive to country) and percentage of income producing use (travelling from work premises to clients) of the car by the employee.

This is done on the basis of kilometres travelled on each activity by the employee. This is ascertained by the employee, for the employer, by keeping a log book of income producing trips for 12 weeks in the first year in which the employee had use of the car.

Once the percentage of private use is established, it is applied to the cost of the car to establish the taxable value of the benefit (for instance, the operating cost of $8,000 with 40% private use would mean a taxable value of $3,200).

Putting aside some transitional rules, the statutory formula method applies a flat 20% to the cost of purchase of the car. (If the car is more than four years old, the cost of the car is reduced to 66.6% of the cost of purchase). Under the statutory formula method, there is no requirement on the employer to establish the percentage of private use of the car by the employee.

That is, the statutory formula is not valuing the car fringe benefit by reference to the employee’s private use of the car. For example, if the car has a purchase cost of $32,000, the taxable value of the car benefit is $6,400 under the statutory formula method (that is, $32,000 x 20%).

The employer can choose whichever method suits them, including the one that gives the lowest taxable value. It is clear that the statutory formula method, like other presumptive tax mechanisms, is a simplification measure; it means an employer (or employee) can avoid the tax compliance obligations associated with keeping a log book under the cost method.

Generally, the statutory formula method will give a lower taxable value than the cost method when the car has a high percentage of private use, and the cost method will give a lower taxable value when there is a low percentage of private use. One could question the costs that are included in calculating costs(and therefore, taxable value) under the cost method (e.g. deemed interest, deemed depreciation). However, it is only the cost method that accurately ascertains the private use element of the car benefit.

This is what a principled, equitable and efficient income tax system should be taxing. Fringe benefits tax (FBT) is a surrogate income tax on employees who receive benefits for private consumption, but one unfair aspect of the FBT regime is that it taxes all benefits at the top marginal rate of tax applicable to natural persons (currently 46.5%) even though the recipient of the benefit may be on a lower tax rate than 46.5%).

This means that where the statutory formula method gives a lower taxable value than the cost method, the taxpayer is getting a tax concession.

This is recognised in the annual Tax Expenditure Statements issued by Treasury. The Tax Expenditure Statements contain a list of items where taxpayers are getting a tax concession, along with an estimate of the aggregate of the tax concession.

The statutory formula method is listed as a significant tax expenditure. On the other hand, where the statutory formula method gives a higher taxable value than the cost method and the employer fails to elect into the lower cost method (this will rarely happen), the employer is being (unfairly) overtaxed. This would be a negative tax expenditure.

The removal of the statutory formula method simply moves this part of the tax system back to a principled position by removing a tax concession. These facts have been completely lost in the “debate”.

In spite of the above, there is a legitimate issue about the start date of the new rules. The removal of the statutory formula method only applies to all new contracts entered into after 16 July 2013, but even then, the statutory formula can be used for the rest of the current FBT year (that is, until 31 March, 2014). After that year, only the cost method will be available.

All existing employee car usage arrangements can continue to use the statutory formula until the car is changed over. In this sense, these new rules are not retrospective. But, many employers and employees would have been in the process of arranging a new car on the announcement date but that arrangement may fall short of having a concluded contract.

In this sense, it is arguable that the Government measure does operate retrospectively for these employers and employees. To deal with the “immediate start date” issue and “retrospective” issue, the Government could have provided for a more generous deferred phase out of the statutory formula method (for instance, until March 2015).

In 2011, when the Government amended the multiple rates under the statutory formula method to move towards one rate (i.e. 20%), which increased the taxable value on most cars, the Government provided a transitional period whereby tax increases were progressively introduced over three years.

More important to the national interest, does this episode (which may not be over yet) say anything about the prospects for meaningful and principled tax reform? It is certainly not encouraging. It does send the message that those with tax concessions, and the industry serving those tax concession recipients, will not give up their concessions without a fight. It probably does not help where there is a lack of bipartisanship, which is the case with the removal of the statutory formula as the Coalition have indicated they will oppose this measure.

Similar to many areas of human conduct, the longer tax concessions remain in place aspart of the tax system, the higher the level of normality that isachieved. Normality and entrenchment can reach the point where usersof the tax concession start believing that the concession is a normalpart of a benchmark tax system.

Some of those complaining about the removal of the statutory formula method may genuinely believe that the government is imposing a tax increase on them over and above what a benchmark income tax would impose, rather than seeing the government’s announcement as the removal of a tax concession.

Many complainants though will be moved by pure self-interest and these people know full well they have been accessing a tax concession. Sadly, our tax system is riddled with many significant tax concessions that depart from a benchmark tax system – such as the 50% tax concession on capital gains of natural persons, 100% exemption on all the gain made on the family home, generous tax concessions on superannuation, failure to tax all land under state land tax regimes.

Some not-so-apparent concessions involve negative gearing, or the current generous treatment of discretionary trusts and the lack of death duties. The longer tax concessions remain in our tax system, the more normality they will achieve. In turn, the harder it will be for future politicians to remove or scale back the concessions.

In a future where Australians demand more services from Government and at the same time resist higher taxes, scaling back tax concessions may be the least displeasing option to meet desired revenue needs. One heartening thing for future governments is that there are still many tax concessions worth a lot of lost revenue that could be wound back.

Dale Boccabella is an Associate Professor of Taxation Law at the Australian School of Business. This opinion piece was previously published on The Conversation under “The truth about FBT on cars: meaningful tax reform is hard“.

Vic Edwards

There are reports that China could be about to witness a sharp economic contraction.

Figures show China’s annual economic growth has slowed to 7.5 per cent in the second quarter of 2013 from 7.7 per cent – the second straight quarter of slower growth. In the past month the Australian dollar has fallen sharply on fears about the Chinese economy.

Never the less, I would like to play down fears of a hard landing in China. Growth at 7.5 percent really isn’t that bad, and certainly not for the world’s second-largest economy. Certainly there are some downward projections for China but these aren’t too severe.

However last week China reported an unexpected fall in its exports and imports, adding to concerns of a slowdown in its economy. Exports fell 3.1% in June from a year earlier, indicating weak global demand for Chinese goods, and this contradicted forecasts of a sharp increase in shipments.

China’s growth this year is below last year’s level as weakening external demand has hurt investment and exports. China has been keen to rebalance its economy, after a decline in global demand hurt its export-led growth, and that is causing pressure on Australia.

This raises concerns about the country’s future economic growth, raising questions about whether the country’s economy is tailing off more rapidly than anticipated. However at least inflation has slackened more rapidly than expected.

China is also the world’s biggest energy consumer and steelmaker, however steel production is slowing. The World Bank has forecast that inflation will fall further, as its economy comes down from the peaks seen last year.

Certainly the markets treat the Aussie dollar as a proxy for China so that slowdown in exports in China is perceived by the market as being a bad sign for Australia. Australia will need to improve its trade standing with China in order to preserve its position as a major supplier of raw materials, as China is actively pursuing other sources particularly through its new BRICS arrangements, particularly with South Africa and Brazil.

Vic Edwards is a Visiting Fellow in Banking and Finance at the Australian School of Business.

Nigel Stapledon

From its lows of just over 4% in early 2008, unemployment  rose sharply to close to a peak of 5.9% in June 2009 before resumption of the resources boom and fiscal stimulus saw it decline back just below 5% in early 2011. Since then there has been a clear trend rise to its current level of 5.7%.

The Treasury estimates have the ‘full employment’ unemployment rate in the range 4.5-5%. Against that benchmark, there is an increasing amount of slack in the economy.

The leading indicators, e.g. ANZ job ads, point to unemployment continuing to rise. It is likely to break over 6% in the second half of the year.

Employment growth is positive but has been and remains at well below the rate needed to match the influx of new workers into the job market. The best measure here is hours worked which is currently showing a (slightly flattering) trend growth rate of 0.8% against long-term trend or required growth of 1.7%.

Mining investment might still be high but it is now declining and causing a decline in construction activity which is just starting to emerge in the employment numbers. With prices squeezing profitability, cost-cutting is the name of the game now.

With the news from China not at all encouraging, if anything there is prospect of a sharper pull-back in mining investment.

Another factor at play is the lagged effect of structural decline in manufacturing which has accelerated in the past 12 months. It will not be reversed by the recent fall in the $A. Firms will need to see it lower and sustained at a lower level before their expected level of the $A will change sufficiently to reverse the trend to closing operations in Australia. On the other hand, tourism might benefit in the short term as particularly some domestic travellers shift to local market.

It is not clear at all that the slack in mining and mining construction will be taken up by housing construction. While interest rates are low, the offset is that the increased risk of unemployment will cause some potential home-buyers to defer a large investment in housing.

Dr Nigel Stapledon, Australian School of Business

Frank Zumbo

With the departure of senator Stephen Conroy after Labor’s recent switch to Kevin Rudd, it is opportune to consider what might now happen to the national broadband network.

There is no doubt the NBN was Conroy’s ”baby” with the Victorian politician having nurtured, protected and driven the project with the zeal of a religious leader determined to recruit as many new followers as possible. For Conroy, the NBN was a vision to be pursued at seemingly any cost.

Conroy’s line was simple. We were asked repeatedly: How could anyone doubt the superiority of fibre to the premises?

The super speed of fibre and the view that fibre would enable endless amounts of content to be streamed into almost every Australian home were the cornerstone arguments in Conroy’s passionate pursuit of his version of the NBN.

It has been a devastating line of attack and Conroy has been relentless in pursuing any critic of the NBN who dared to speak out. The problem was always going to be that Conroy’s NBN was just one possible path to high-speed broadband. Much like different religious leaders having different paths to the ultimate goal, there was always going to be a difference of opinion as to the most appropriate path to a national high-speed broadband network.

Fixed versus wireless was going to be the obvious first point of contention. This is closely followed by the debate about fibre to the premises or fibre to the node. Ultimately, however, the real debate would always centre on the relative time and cost of pursuing the different paths to a national high speed broadband network.

Here the point is simply that Conroy’s NBN is by far the most expensive version of a national high-speed broadband network.

Trying to connect almost every home with fibre was always going to the stumbling block and the ever-present threat to the NBN. That is assuming there would be a sufficient, ongoing amount of skilled labour and technical expertise at an affordable price to sustain a project of an increasingly unknown duration.

Just think about it. Walk down any street of Australia and you will see many houses that would need to be individually connected under Conroy’s NBN. Multiply the number of houses by the thousands upon thousands of streets across Australia and you start to get some idea of the magnitude of the task ahead for Conroy’s NBN.

The danger of a large cost blow-out will constantly hang over Conroy’s NBN. A nice-sounding vision of connecting almost every home to fibre can soon become an economic nightmare. Ongoing delays in deploying Conroy’s NBN will add considerable costs to an already very expensive project.

These cost blow-outs eventually get passed on to consumers one way or another. More problematic for consumers is that construction delays in the NBN would mean that it would take longer for consumers to get access to the promised higher broadband speeds.

So, while Conroy pursued his NBN with zeal, it was always going to be a race against time. The NBN was only guaranteed while he remained the the Broadband and Communications Minister and so long as Labor stayed in power. Any change in minister or government would inevitably cause a rethink, or at least a risk of a new minister wanting to put his or her mark on the project.

If there’s one thing that is certain in politics, it is that each minister wants to cast a project in his or her image. A new minister often means a new approach or nuances on the previous minister’s approach.

Will Conroy’s NBN survive in its present form? Time will tell if the new Minister for Broadband and Communications, Anthony Albanese, has any new ideas of his own. With the NBN still in the relatively early construction stage it is clearly vulnerable to change now that Conroy has gone.

The workforce and engineering challenges that have delayed the construction of the NBN are likely to cause a reassessment sometime soon. Then there is the lingering debate as to whether fibre to the premises is ”superior” as claimed. Yes, fibre may be superior if you want to be connected to a landline and download lots of content on a regular basis, but it may not be superior if you want the mobility and convenience that wireless provides.

Any assessment of ”superiority” depends on the requirements of each individual consumer and a ”one-solution-fits-all” view was the inherent flaw in Conroy’s NBN.

At the end of the day, a national high-speed broadband network is really all about access, convenience and affordability. What’s the point of building the most expensive fixed broadband network if it can only be accessed from your home?

It makes more economic sense to provide a fixed broadband network that provides a basic high-speed service with fibre to the node, with the potential for high-end users of broadband to be able to upgrade to fibre from the node to the premises. And let’s not forget that wireless will become the preference for all but the people who prolifically download content.

Frank Zumbo is an associate professor at the school of business law and taxation at the Australian School of Business.

A shorter version of this opinion piece appeared in the SMH.