Michael Peters

There is perhaps no greater failure of competition policy than access to airports.

The Australian Competition and Consumer Commission’s (ACCC) submission to the Productivity Commission’s inquiry into the economic regulation of airport services states that airports should face tougher rules to discourage excessive parking and other fees.

I can’t help but feel we all pay for this anomaly.

The ACCC has stopped short of suggesting that there should be price caps, however the ACCC has revealed airport charges passed on to passengers make up as much as 20% of the cost of Qantas and Virgin’s cheapest airfares, and even more for budget carriers, and wants to curb the potential for privatised airports to reap excessive profits through market strength.  The ACCC is concerned that some airports may have used their market power to achieve monopoly profits in services provided to airlines and in car parking.

There is little doubt that airports have taken advantage of their market power to the detriment of key industries such as tourism and couriers, as well as everyone who flies for business. The extra costs the airports impose impacts on the entire economy.

The ACCC says the threat of arbitration would encourage fairer commercial negotiations between airports and airlines when determining charges, but it has not pushed for a return of price caps fearing tourism could be harmed.

That’s fair enough, however this form of profiteering is a burden to the economy.

It restricts productivity and distorts the market. In particular the cost to the community is significant. For many years successive governments and the regulator have attempted to do something about our airports – just as they tried to do with Telstra. The answer is the application of sound public policy and to vigorously pursue competition law enforcement to ensure access to key infrastructure.

I want to see a total reform of this area. Rod Sims – the new Chairman of the ACCC – and the ACCC as a whole is in a unique position to finally deal with the elephant in the room that is passengers using the nation’s airports.

Michael Peters is a Lecturer in Business Law and Taxation at the Australian School of Business.

Rosemary Howard

Childcare for many families is the second biggest expense after the mortgage. If laptops, cars and mobile phones are all tax-deductable, why isn’t childcare?

In a recent Knowledge@Australian School of Business article, leading business women and academics have flagged childcare as the single biggest and most directly related cost to earning income that should be eligible for a tax rebate.

That’s why it makes economic sense for it to be firmly on the agenda for next week’s Tax Summit in Canberra.  To fulfill the required rise in national productivity and global competiveness, we must address this issue head-on.

The prohibitive cost of childcare affects all families. The lack of financial support in the form of childcare incentives is a serious impediment to women’s participation in the workforce. It is at odds with the nation’s shared objectives when it comes to advancing women into leadership roles, including those at the executive and board level.

Women’s poor representation at the top of the business ladder has been a topic of robust discussion. The latest statistics show that of ASX 200 appointments, woman make up 51 per cent of professionals but only fulfill 2.5 per cent of chair people, 11 per cent of board appointments and 3 percent of chief executive roles.

The 2010 Global Gender Gap Report, a publication of the World Economic Forum, found Australia ranked as No. 1 in terms of educational attainment but No. 44 for labour-force participation of women. This shows that Australia has one of the most highly educated female populations in the world, yet we do not allow women to fully participate in the workforce. The current gender bias means that women are not being employed in roles where they can be most productive.

Substantial childcare incentives could not only help lessen the gender gap, but drive productivity levels. This is supported by the Productivity Commission’s July 2011 research which shows that a 1 per increase in early childhood education and care fees leads to a 0.3 per reduction in the employment rate of mothers with young children and a 0.7 per decline in hours worked.

According to a 2009 Goldman Sachs report, Australia’s Hidden Resource: The Economic Case for Increasing Female Participation, having more women in leadership roles has the potential to boost the level of economic activity in Australia by 20 per cent.

Unless the government is prepared to increase taxpayer subsidies for childcare, the increasing cost of childcare will continue to limit women’s participation in the workforce; ultimately inhibiting their career advancement.

Rosemary Howard is Executive Director and Conjoint Professor of AGSM Executive Programs at Australian School of Business, UNSW.

Dale Boccabella

At the October Tax forum, to be held on October 4^th and 5^th 2011 in Canberra, experts and academics are to sit down and discuss taxation in Australia. Alas, with all the noise ahead of the Tax Forum, little attention has been focused on trusts.

I want to see them resolving the treatment of discretionary trusts.

Discretionary trusts (DTs) have become pervasive and they will grow in number. In addition to DTs being set up by living persons (principals), it has become common practice for many assets passing on death to be housed within a DT (testamentary trusts/discretionary will trusts). And, wealth that will pass to future generations in Australia over the next 20-years or so will be unprecedented.

So what makes DTs popular? To answer this we need some understanding of this “entity”. It is a trust. But unlike many other trusts (e.g. listed property trusts, listed share trusts), the [potential] beneficiaries do not have fixed entitlements to capital or income. Whether a beneficiary gets a distribution of capital or income is at the discretion of the trustee (legal owner of trust property) and/or those behind the trust. Accordingly, a beneficiary does not legally own anything until the trustee decides to make them a distribution.

The trustee is the legal owner of trust property, but trust property does not belong [beneficially] to the trustee. The trustee is often a “$2 company”. Often, trust property will have been transferred to the trust for no money by the people behind the trust (usually Mum and Dad). These people are likely to be potential beneficiaries along with the children, and a family company.

As well as being the only shareholders in the $2 trustee company, Mum and Dad may also be the appointers of the trust. Appointers have power to remove a trustee if they are not satisfied with the way the trustee is exercising his/her/its discretion.

What flows from all this? First, assets held within a DT are generally beyond the reach of creditors of the beneficiaries, and creditors of the principals who set up and transferred assets to the DT. This also means the trustee in bankruptcy of a beneficiary or the principals usually cannot access those DT assets. Further, the principle that creditors of a trust (e.g. suppliers of goods to trust) can, in certain circumstances, access the assets of beneficiaries of the trust, does not apply to a DT.

In terms of “divisible property” for the purpose of a family law proceeding (relationship breakdown), the Family Court can take into account assets held in a DT, but this is less likely where the DT’s assets existed before the failed relationship commenced.

Secondly, the DT allows the trustee flexibility to make income (and capital) allocations to beneficiaries based on their differing needs and capacities. For example, one of the children might currently be unemployed or sick and therefore a greater income allocation can be made to him/her for the current year. The DT also allows the trustee to defer or stagger a particular child’s entitlement because there is concern about the child’s big spending habits (spendthrift). It should be said though that it is rare that the flexibility of the DT is sought to deal with the differing capacities and needs of beneficiaries. Other less sophisticated legal arrangements can more than adequately deal with the differing needs and capacities scenario.

Thirdly, and this is usually the most important advantage sought, the DT allows for tax minimisation; substantial minimisation. The flexibility that has a genuine non-tax basis to it (see above) also provides the means to minimise tax by, for example, allocating a given taxable income across a number of taxpaying units (simple income splitting). In addition, the DT allows income allocations across tax years to take account of beneficiaries’ other tax profile that can change over years. There is also the advantage of streaming different income types to beneficiaries who can make best use of certain items of income, a technique the government has recently re-endorsed.

There are many other tax advantages from a DT including allowing income allocations to children under 18-years of age to be taxed at the adult tax rate schedule where the DT arose under a will (testamentary trust). Normally, under-18s are taxed at a penalty rate of tax on their unearned income.

The advantages of DTs are quite substantial. No other entity comes close to offering all the advantages of the DT; some offer one or two advantages of the DT. And of course, one person’s advantage is another person’s disadvantage. For example, suppliers to DTs may have trouble getting payment for debts, and minimized tax through DTs must be made up by other taxpayers or government services must be reduced.

Are there any disadvantages to those using a DT? The main one is the danger of a “rogue trustee”. That is, the trustee might exercise their discretion in a way contrary to the wishes of the principals who set up the DT. With careful legal drafting, including wise selection of appointers, safeguards against this can be provided.

It is one of life’s twists that DTs can also breed suspicion and “distrust” amongst “beneficiaries” who would otherwise (fixed trust) expect an entitlement. The reason is that entitlements under a DT are contingent on the trustee’s discretion so that a beneficiary may be at the whim of the trustee, and those controlling the trustee.

The cost of financial planners, tax advisors, lawyers, etc, in setting up a DT and properly maintaining it can also become expensive as an effective DT must be kept-up-to date with changes in the circumstances of relevant parties. Indeed, these professionals are doing, and will continue to do, a solid trade in DTs.

By and large though, the disadvantages to those who can avail themselves of a DT are not significant and are overwhelmed by the advantages. And, no other entity (e.g. fixed trust, company) comes close to offering the same or similar tax and non-tax advantages.

As far as tax goes, various government inquiries have endorsed the current tax treatment of DTs. Indeed, the Assistant Treasurer, the Hon Bill Shorten MP told a Tax Institute conference recently: “We don’t believe trusts are any form of tax avoidance. We see trusts as a legitimate feature of how Australians conduct their financial affairs.” The tax advisors listening must have had a quiet chuckle; they need to be quiet because a loud chuckle may prompt the Assistant Treasurer to actually check the basis for that ridiculous statement.

Equally important are the non-tax advantages. To my knowledge, there has not been a systematic and comprehensive inquiry on the asset protection aspects (code for not paying debts), property division aspects, etc, of DTs. However, there has been isolated reform in various areas that has reduced the abusive use of the DT (e.g. pensioners cannot house assets in a DT and avoid having those assets counted for asset and income testing purposes).

The pervasive use of the DT has snuck up on society. The time for a comprehensive review of the advantages and disadvantages of DTs has come. At the moment, many Australians are gorging themselves on the advantages of DTs, and similar advantages are not available to others.

Dale Boccabella is an Associate Professor at the Australian School of Taxation and Business Law.

Michael Peters

New legislation is intended to more closely regulate the duties and pay arrangement of financial planners.

However I would argue that more regulation is not the answer.

Financial Services Minister Bill Shorten’s new legislation has been largely supported by the financial services industry however the chant coming from government once again is ‘when in doubt regulate’.  It will only increase costs, make it less accessible and is unlikely to provide better advice.

Under the legislation, known as Future of Financial Advice (FOFA), financial planners will be obligated to renew contractual arrangements with clients every two years from the beginning of July next year.

It is proposed that what are called ‘fiduciary duties’ are to be codified, however most of what the law will require is good business practice, so why make it law? Why not put it in a code of behaviour endorsed by ASIC and enforced by the ACCC like other professions such as travel agents?

As proposed the legislation will also offer more powers for the financial regulator, ASIC, which will be given additional power to intervene earlier, as well as allowing the regulator to ban financial planners in certain circumstances.

Why are we using regulation to make people feel immune from the market place – which will sometimes lose them money?

People will still miss out on their bet on the stock market or interest rates, and that is quite simply how markets work. Protecting people from themselves through more regulation does not mean people will not lose money. Instead, it means those with money are likely to get access to better advice than those who cannot afford it.

Under the legislation, brokers would have to restructure remuneration arrangements on margin lending, cash management and banking products, and other product solutions sold to retail clients such as managed funds.

There is enough law to regulate planners and advisers; it’s just a matter of enforcing these rules, rather than making more law.

Michael Peters is a Lecturer in Business Law and Taxation at the Australian School of Business

Anil Hargovan

The need for directors to be aware of the business fundamentals, to have a questioning mind and to maintain familiarity with the financial status of the company is nothing new to the law on directors duties– such expectations were well established prior to the Centro decision.  However, when such expectations are marshalled and directed to the directors reporting obligations, they begin to bite.

It is now clear it is getting much harder to get people to sit on boards. This may be a hurdle for the government’s plan to increase the diversity of boards.

In September 2007 Centro directors failed to detect an error that led to more than $2 billion of short-term debt being classed as long-term debt. ASIC has now obtained a judgment that calls for proper diligence when directors are reading financial statements. 

I feel the message for directors is clear – namely, reading of the financial statements is not to be a passive exercise, nor will skim reading suffice.  Going through the motions will not be tolerated.  Scrutiny and the understanding of content is required.  This necessitates financial literacy skills. 

The need for financial literacy has been well established by case law. However I believe the Centro decision elevates the financial literacy requirement in a robust manner. 

On the facts of this case it was held that the apparent errors in the financial statements were not complicated.  This is a judgment call which potentially gives rise to uncertainty.

What may appear to be uncomplicated to a judge, with the benefit of expert evidence, may appear to be complicated to a director, particularly given the push towards board diversity by the ASX recommendations on good corporate governance practices.

We are entering unchartered territory here, especially not knowing to what extent should directors be familiar with accounting standards. The mapping of the boundaries, between complicated and uncomplicated items in financial statements, will be reliant on future case law in this area.  Until then, directors will have to live with this uncertainty which is unsettling and unsatisfactory.   

The sting in the judgment lies with the finding that being surrounded by financial experts, or having an Audit Committee, is helpful but not necessarily a panacea for the discharge of the directors reporting obligations.  The Centro decision sends out a strong message for directors to take their financial reporting obligations personally and seriously.  The approval of the company’s financial reports is a personal and fundamental responsibility of each director as emphasised by the judge which is a recurring theme in this case.

In the future the big issue from this decision is do we want to hand the responsibility to experts to free up the directors to focus on other matters like leadership in business skills and strategy or do we want to turn directors into accountants?

This is a policy debate raised squarely by the Centro decision which rejects the notion that compliance obligation for financial reporting lies exclusively with financial accountants.  Centro decision suggests that the time is ripe to revisit policy issues on the role of a company director to provide greater clarity and certainty on the demands expected of this profession.  Herein lies the danger – the Corporations Act says that anyone over the age of 18 can be appointed a director but then, with limited exceptions, remains largely silent on the performance expectations of directors. A reading of the Corporations Act gives little indication of the true challenges and skills set required to successful discharge the responsibilities of office of director. 

The Centro decision is also a wake up call for legislators to address and focus upon the current lack of direction and guidance in the Corporation Act, such as the need for financial literacy, which has simply failed to keep pace with judicial developments in this area of law.

In considering this, I also think there is a dramatic implications for boards in Australia. 

Company directors may be understandably concerned by the ramifications of the judgement which has the potential to undermine the movement towards more diversity of boards. The encouraging signs and momentum in attracting board diversity, currently at a record high, (Women comprised 25% of all new appointments to ASX 200 boards in 2010, compared to only 5% in 2009 and 8% in 2007 and 2008: AICD Figures) which may well be arrested as a consequence of the Centro decision.

Should the Prime Minister deliver on her threat to legislate to lift the representation of woman on boards, the policy outcome will be a potential disaster unless remediated/accompanied by lessons in financial literacy for all such appointees to the board.

Associate Professor Anil Hargovan is at the Australian School of Taxation & Business Law at the Australian School of Business

Senior Lecturer Laurel Hixon

In its boldest recommendation, the Productivity Commission explicitly considers the different parts of aged care, namely care (including personal and health care), everyday living expenses and accommodation differently.  This acknowledges the varying roles of the private market and of public risk-sharing.

With regard to both health care and retirement income, the Australian government has taken the approach of moving greater responsibility “off budget” and on to the individual and private sectors through private health insurance subsidies and mandatory superannuation schemes.

As aged care services interface with the health care system and aged care financing is closely linked to aged care pensions, it follows then that policymakers are likely to consider the same strategy—i.e. greater reliance on individuals and the private insurance sector—for addressing the future growth associated with the services needed to care for an ageing population.

On the financing side, one of the most hotly debated topics was whether or not a proposal should be put forward for insuring the risk of aged care and, if so, should it fall in the private or public domain, and should it be mandatory or optional.  In medical care, it has been well demonstrated that if a person does not know when or whether they will need care, and the cost of that care is expensive, then insurance is needed to spread the risk over people.

Yet, aged care is different from medical care in a number of important ways. What the Productivity Commission acknowledges is that certain aspects of aged care are similar to medical care and the risk of that care should be spread over the largest population and the rest should remain a private responsibility.

There are, however, two issues at play in insuring risks. One is spreading the cost of care over the widest population, the other is spreading the cost of care over time. The Productivity Commission supports retaining the pay-as-you-go tax financed scheme which spreads the risk over people, but not time. Then, with the accommodation and every living expenses which are predictable, the Productivity Commission supports these costs be covered privately within certain limits.

Moreover, the Productivity Commission acknowledges that a variety of non-traditional funding schedules be put forward. Specifically, they recommend government-sponsored equity release schemes under which money could be drawn down from the equity in a person’s home to pay the predictable living and accommodation costs.

Senior Lecturer Laurel Hixon is a Research Associate from the Australian Institute for Population Ageing Research at the Australian School of Business.

Jonathan Reeves

As it tries to find a way out of its debt ceiling crisis and the economic doldrums, a consequence of US policy is that inflation is being exported to the world, and that includes Australia.

Unlike the European Union, or indeed any other enterprise in the world, the US Federal Reserve has the unique ability to print more US dollars if it – and the US Treasury – deems that this is in the US economic interest.

We have had QE1, we have had QE2, and as a result of the debt ceiling compromise we may well also have QE3. The US debt deal includes major fiscal cut-backs, increasing the likelihood that the US will continue to rely on heavy monetary stimulus in its post GFC recovery phase.

It is a policy which is keeping the value of the greenback down and contributing to the record high values for the Australian dollar, a factor which is not necessarily good for our economy. Just ask the Australian education, tourism and manufacturing sectors how they are faring right now.

Inflation is a global issue and the Americans are only one, albeit large, factor in fuelling its momentum. Energy costs are rising, as is the cost of food around the world.

The reality is that US policy has intentionally devalued the $US through the mass printing of money, putting substantial pressure on the AUD$ exchange rate and the Reserve Bank’s inflation and interest rate policy.

Currently, the RBA has an inflation target of between 2 and 3 percent. Referring to this target has been a major reason why the RBA’s official cash rate have progressively risen to 4.75 percent. With a widening interest rate differential it is no surprise that the $AUD has climbed so high against the greenback, as speculators pile into a currency which – like the Brazilian real – is one of the hottest in the world right now.

All this calls into question the wisdom of the RBA’s target inflation numbers. The 2 to 3 percent per annum target is far too low in the current economic climate, and adhering to it can only exacerbate the developing exchange rate, interest rate and export issues we are currently experiencing.

Instead, the RBA should raise its inflation target to 4 percent, a move which would help us avoid some of the economic problems we have seen internationally. Raising the target would certainly take some of the pressure off the RBA to raise interest rates, and it would also take some momentum out of the $AUD’s strength.

Mining magnates may be sitting on unprecedented wealth, but a look at the rest of the economy shows that personal debt levels are at record levels – comparable to struggling economies such as Ireland. Raising rates to fight inflation would create significant financial distress and prompt sharp falls in property values, further dampening already fragile consumer and business sentiment.

Inflation at 4 percent would assist in reducing debt levels, as it did in World War II following the Great Depression.

It seems that the RBA may be mindful of this, despite maintaining its current inflation targets. Earlier this month RBA Governor Glenn Stevens said the board believed “it was prudent to maintain the current setting of monetary policy” in view of the “acute sense of uncertainty in global financial markets over recent weeks.”

The RBA has not raised rates since November 2010, and inflation has been creeping upwards and currently sits at 3.6 percent. Officially amending the inflation target would take the wind out of ongoing expectations of a rate rise and could prompt some easing in the value of the $AUD.

At 3.6 percent, Australian inflation is not high by current international comparisons and does not pose as much of a threat to our economy as record highs for the currency. Given two “evils” – inflation or an appreciating currency – it is clear that our current level of inflation is by far the lesser evil of the two.

In fact, tolerating a higher level of inflation could be the key to helping Australia navigate the turbulence of the global economy.

Dr Jonathan Reeves is a financial economist at the Australian School of Business at the University of New South Wales.

A version of this opinion piece appeared in the Australian Financial Review on the 9 August 2011.

Dale Boccabella

There has been a release of a discussion paper on priorities and directions for tax reform ahead of the Government’s October Tax Forum.

The tax forum discussion paper provides a useful summary of the main problems facing the tax system, including the transfer system and stamp duty. It also provides a clear direction on what the government wants discussed at the forum.

The forum, to be held on October 4th and 5th 2011 will consider unresolved elements of the wide-ranging report into tax reform produced last year by a panel led by former Treasury Secretary Ken Henry.

Very little harm can come from the government’s October tax forum, but unfortunately, the good to come from it is likely to be marginal – or at best insignificant – because it appears after all, to be just another discussion opportunity for tax experts to chew over the issues.

The government has ruled out overhauling the GST and hasn’t put it on the agenda of the October tax forum. Instead, the forum will look at state taxes such as stamp duty, payroll tax and insurance levies; however some states have now said they are not going to sacrifice their limited taxing powers without compensation.

Some glaringly obvious problems with our tax system are known to everyone attending this forum. I want to see them resolving the treatment of discretionary trusts, the continuation of negative gearing, open-ended exemption for capital gains on homes, the effectual absence of death duties, and the destructiveness of state stamp duties. Alas, it seems not much will be done about it.

The Federal Treasurer Wayne Swan has tabled a discussion paper to guide the forum today, and has made clear it will not revisit tax decisions made in the past year, including the planned mineral resources rent tax, a reduction in corporate tax rates and an increase in the superannuation guarantee from 9 per cent to 12 per cent.

There comes a time when tax experts should stand aside and let political scientists and opinion shapers hammer out the issues. There needs to be a real consensus across political parties that this must be resolved. Consensus builders must ply their skills and work out a way forward.

Associate Professor Dale Boccabella is from the Australian School of Taxation and Business, at UNSW.

Gordon Mackenzie

When planning for one’s own death, it isn’t wise to depend on handing over superannuation funds to beneficiaries.

Spouses and children face the prospect of significant tax bills upon the death of a parent or partner following a ruling by the Australian Taxation Office.

The ATO ruling clarifies the manner in which pension assets will be treated following a death, and mean that private pensions are no longer tax-free upon the death of a pensioner and that any beneficiaries will have to pay capital gains and income tax on the assets.

What we are seeing with this ruling is the view that super funds should not be used for estate planning purposes.

If a death benefit is paid to someone other than a spouse or dependent child, the taxes in the fund and when the benefit is paid reverse the tax concessions that the deceased got for using a super fund in the first place.

What that means is that benefits paid to non-dependant adult children, say, will be taxed at an effective tax rate of 31.5%, (or 16.5% on capital gains). That rate is, broadly, the tax rate that most Australians would have paid had they not used a super fund on that account balance. So, in that way the tax concessions for using a super fund are recaptured.

Gordon Mackenzie is a Senior Lecturer and Program Convenor at the Australian School of Taxation and Business Law at the Australian School of Business. Gordon Mackenzie has given submissions to Henry Tax Review Panel on Resolving the Tax Inefficiency of Losses, and the Cooper Review on Tax Governance of Superannuation Funds, into the structure and operation of Australia’s superannuation system.

Associate Professor Dale Boccabella

The Federal Government has looked at slashing the tax free threshold for duty free goods, following complaints from retail giants that shoppers now want to buy online overseas. Retailers say they want a tax barrier to drive customers back into their stores, and a report by PwC today says that although Australia lags behind in online shopping, it is catching up fast, with an increase of 13% in sales expected this year.

However this could cost Australia more. The cost of collecting the tax may outweigh what tax revenue could be raised. As the Board of Taxation indicated around a year ago, there are many practical difficulties in collecting GST on goods bought over the web where the online shop is overseas.

The Government has now confirmed that it has examined reducing the threshold to $500, however online retailers such as eBay say that only a very small minority of transactions would be impacted by this, and little additional revenue would go to the government, which puts the cost of implementing the change at $38 million.

There are two alternatives to collecting the tax, both of which would be costly and time consuming, and neither of which would actually raise any significant revenue.

We could get the Australian consumer to collect the GST on the sale made to them and send a remit to the Tax Office. The bottom line here though is that Australian Governments are very reluctant to impose tax collection or reporting obligations on consumers as opposed to businesses. Quite simply, consumers wouldn’t want the hassle, and wouldn’t be thankful for having this burden imposed on them.

The alternative is to ensure that all companies that can trade online with Australian consumers are registered for GST. However, the government is under considerable pressure to keep overseas companies with only a few Australian customers out of our GST system because of the high compliance costs that go with GST registration, which would mean that the compliance costs can outweigh the revenue collected.

Indeed, one could query why the low value threshold was increased so significantly to $1,000 (from $250) in 2005, and why there wasn’t much opposition from retailers at the time. The brick and mortar retailers may have a point that this is placing them at a competitive disadvantage. However Australia’s GST is ‘only’ 10%. Admittedly anecdotal, I have seen price differentials between on-line goods and brick and mortar goods that cannot be explained by the presence or absence of GST, and is more likely to be from the high cost structures of brick and mortar businesses, and possibly from excessive mark-ups.

Dale Boccabella is an Associate Professor of Taxation Law at the Australian School of Business, University of New South Wales.