Tuesday, April 28, 2015

Negative Gearers are the opposite of battlers and they don't build many new homes

What is it with Scott Morrison?

The Social Services Minister thinks negative gearers are battlers. Plenty of them are "on meagre incomes", he told Sky News last week. He said it three times.

"They've just done it for their kids, they've done it for themselves and they've made big sacrifices to do it," he told a disbelieving interviewer. "It's aspirational for people to have that opportunity to go and invest in property to try and provide for their future, and people on meagre incomes do it and they make big sacrifices."

Negative gearing is a means of avoiding tax. No one begrudges anyone the right to buy an investment property and to make money out of it. Britain, Canada, the United States, France, Germany, Japan and most of the nations with which we compare ourselves are teeming with landlords who do just that. But those nations do not go further, as we and New Zealand do, and allow landlords who lose money to use all of their losses to cut their taxable incomes, often pulling themselves down into lower tax brackets.

The losses do not last. Negative gearers expect to eventually sell their properties for profits big enough to wipe them out. But thanks to an expensive and unexpected decision of the Howard government in late 1999, only half of the eventual profits are taxed. That's right. Since the turn of this century, negative gearers have been able to cut their taxable incomes by 100 per cent of their annual losses, but have only had to boost their taxable incomes by 50 per cent of their eventual profits.

It is as if our entire tax system has been "screaming at taxpayers to gear up to earn increased capital gains, rather than to work harder to earn increased wages," as an economist advised his clients at the time.

Before the change, Australian landlords made money...

In 1999-2000 they made a combined profit of $219 million. By the most recent year for which figures are available, 2011-12, they lost a combined $7.86 billion.

But they're battlers, right? Morrison says 70 per cent of them earn $80,000 a year or less. But there's a trick: the figures he quotes come from the Property Council, which has sourced them from Tax Office data on "taxable incomes".

Of course, negative gearers attempt to cut their taxable incomes to just below $80,000. Why wouldn't they? That is the point of the exercise. Anything above $80,000 faces a marginal tax rate of 37 cents in the dollar or more. Anything below faces 32.5 cents. A graph in the government's tax discussion paper shows an unusual bunching of taxable incomes just below $80,000.

Many manage to cut their taxable incomes much further. Astonishingly, one in every 12 tax filers reporting a taxable income of $10,000 or less claims a negative-gearing tax deduction. Given that no sane bank would lend to anyone whose income was really that low (especially for the purpose of losing money), it is a fair bet most earn much more.

Many are retirees, whose income from superannuation isn't counted as taxable income. Some are on an awful lot more than $10,000 a year.

The Tax Office stats show 75 of the taxpayers purporting to earn $10,000 or less actually pull in $250,000 or more. Five make $1 million or more.

Reserve Bank calculations suggest the top 20 per cent of earners owe the bulk of investor housing debt (60 per cent). The bottom 20 per cent ower just 2 per cent.

It is disturbing that a government minister would prefer the assessment of the Property Council to that of the Reserve Bank - all the more so when that minister is in charge of social services, the department responsible for working out who really is a battler.

It has its own way of dealing with negative gearers. It denies them deductions. For years now, it has told anyone who loses money on a rental property that their losses do not count for the purpose of assessing their income for family or childcare benefits.

Michael Pascoe has reported in this paper that eligibility for the Medicare surcharge, the private health insurance rebate, the seniors tax offset and the requirement to repay higher education loans are all calculated without reference to losses incurred by negative gearing.  

The government acted on higher education loans soon after they were introduced. High-earning graduates were becoming property investors and running up losses in order to force their incomes down below the repayment threshold.

All the Council of Social Service asked for this month was for that approach to be made universal. Labor opened the door a little when it said any changes would be taken to the next election and would not apply to people who had already invested. Then Morrison pounced. It was a pity. His colleague Joe Hockey had been musing along similar lines.

The ANU Tax and Transfer Policy Institute says dumping negative gearing could save up to $7 billion and fund "Reagan-style tax cuts". The US president Ronald Reagan moved against negative gearing in 1986.

What do we get for it? Very few new homes. The more popular negative gearing has become, the less it has been used to build new homes and the more it has been used to bid up the price of existing ones. Back in the 1980s, every fifth new investor loan built a home. It is now every 15th.

In The Age and Sydney Morning Herald

Tuesday, April 14, 2015

Superannuation. At last, Hockey takes aim at Costello

Call it karma. It has fallen to Joe Hockey to undo two of the stupidest and potentially most expensive decisions ever made by an Australian government. They were made by the Howard government of which he was a part.

But they were driven by its treasurer Peter Costello, and by the treasury itself.

Costello announced both on budget night 2006 with something of a flourish.

They constituted "the most significant change to Australia's superannuation system in decades".

They would "sweep away the current raft of complexity faced by retirees, increase retirement incomes, give greater flexibility as to how and when superannuation can be drawn down, and improve incentives for older Australians to stay in the workforce".

About the only thing he didn't mention was their long-term cost.

His departmental secretary Ken Henry was proud. They were "as good as anything I've seen the department produce in the 20-odd years of my treasury career," he told his staff.

They showed the treasury shaping "strategic thinking, achieving results, exemplifying drive and integrity, cultivating productive working relationships and communicating with influence".

The first of those decisions made super payouts entirely tax-free for most Australians aged 60 and over. Even lump sums. Economist Saul Eslake described it as "one of the worst taxation policy decisions of the past 20 years". It was worse than it looked. Tax-free payouts are quite sensible in theory. After all, withdrawals from bank accounts are tax-free. That's because the income that goes into the account is already taxed, and the interest earned on the money in the account is already taxed. It's the same for super: tax has been paid as the money is earned and as the returns accrue, albeit at concessional rates.

But the earnings of super accounts stop being taxed when the retiree begins to take money out. Costello insisted (against the against the advice of treasury) that this provision stay, meaning that the earnings of retirees who had turned 60 weren’t taxed at all, regardless of their size. Low and middle income Australians who continued to work into their 60s continued to pay tax. But high income Australians who didn’t need to work paid nothing, if all of their income was channeled through super...

The budget papers had it costing $6.2 billion in its first three years.

But they were silent on what it would happen beyond that as more and more Australians spent their entire working lives in super and their balances swelled. Back then only 18 per cent of the population was aged 60 and over. It's now 20 per cent, on its way to 25 per cent. Costello had opened an ever-widening hole in budget revenue.

But at least it would get people off the pension, right?

It might have, were it not for the second decision.

The pension assets test was to be eased so that instead of losing $3 of fortnightly pension for each $1,000 of assets above the threshold the retiree would lose only $1.50. As before, the family home wouldn't count. It extended the part pension to a new wave of previously-excluded wealthy retirees, and with it the much-prized Seniors Health Card.

Labor's Kim Beazley and then Kevin Rudd backed the changes. Only the Greens said no. When they passed the Senate the assistant treasurer Peter Dutton declared 27 February 2007 "super day". It had ushered in the "the greatest reforms to superannuation in Australia's history". For the first time couples with a million dollars in assets (plus a family home) found themselves eligible for some of the pension and the all-important health card.

So great was the cost that the Abbott government reportedly considered axing the pension extension it in its first budget. As it prepares for its second, the Social Security minister Scott Morrison has is seriously considering a proposal from the Council of Social Service to reign it back in. He has reached out to the Greens and the independents for support. Hockey's tax discussion paper has called into question the worth of the zero tax rate on fund earnings for the over 60s saying it opens up "tax planning opportunities".

Even the Association of Superannuation Funds, as attuned as anyone to the worth of tax concessions, says they go too far for very high earners. It says a small group of 24,000 retires receives average super payouts of $216,000 per year, all tax free. Non-retirees earning a fraction of that income pay tax.  

"It is appropriate for the community to start questioning whether it should fund growing tax concessions on very high balances," it says.

The tide is turning. Hockey will start to clean up Costello mess in the May budget. He'll finish the job after a retirement incomes review later in the year.

In The Age and Sydney Morning Herald

Related Posts

. Advice for Hockey: Slug super and fix the budget in one hit

. Budget 2015. Will Hockey ramp up tax on super contributions?

. Super. Greens offer Abbott $13 billion


Tuesday, April 07, 2015

The pharmacy protection racket that keeps prices high

Do you ever yearn for a return to the days before supermarkets when shopping meant a separate trip to the green grocer, the dry goods grocer, the butcher, the baker and the delicatessen?

Me neither. Life has become busy. Two-earner families shop at one-stop shops because we no longer have time for repeated stops.

Except for chemists, where we are forced to.

Hours after last week's Harper Competition Review recommended an end to pharmacy ownership and location rules the Pharmacy Guild defended them by appealing to nostalgia.

"By ensuring that pharmacy ownership is widely spread, the major supermarket chains are prevented from securing the high degree of market dominance they have obtained in other areas such as grocery retailing" it said, apparently under the delusion that we would prefer our groceries to be sold by someone other than the big supermarket chains.

The truth is we've voted for the supermarket chains with our with our feet. We are likely to continue to vote for them should they be able to sell pharmacy-only medicine and dispense prescriptions (using qualified pharmacists) as they can in the United Kingdom. The best guess is its decision to allow supermarkets to sell medicine cut the prices charged by 10 to 30 per cent. Few in the UK would turn back the clock.

The rules governing Australia's pharmacies are so strange we've come to think of them as normal. They apply in no other industry. Whereas any Australian can own a doctor's surgery or an electrical or plumbing business, only qualified pharmacists can own new pharmacies. The restriction isn't to ensure that those qualified pharmacists work in the pharmacies, many of them own many pharmacies or are retired. It's to make sure no-one else can own them, because apparently supermarket goods and pharmacies don't mix. It's illegal for a pharmacy receiving government payments to be located in or accessible from a supermarket, defined in the 56-page handbook as "the type of store in which a person could do their weekly shopping from fresh food (e.g. dairy, meat, bread), pantry items, cleaning products, personal care items and other household staples (e.g. laundry pegs, plastic food wrap)".

Except for those supermarkets operated by pharmacists *within* their pharmacies. Brisbane's SuperPharmacyPlus has set up an IGA within it allowing customers to "grab it and go".

If you can't find a pharmacy near you, there's a good reason. The industry is effectively closed to new entrants. Any pharmacist trying to set up a shop within 1.5 kilometres of an existing one is denied the use of the Pharmaceutical Benefits Scheme. There are exceptions - pharmacies can be closer within shopping centres (so as not to annoy the likes of Westfield) but there needs to a distance of 500 metres between them when measured in a straight line "from the mid point at ground level of the public access door of each of the premises". In country towns pharmacies have to be 10 kilometres apart.

The Guild says the rules ensure pharmacies are evenly distributed. But they don't always.

The Canberra suburb of Hackett remains a black hole after a pharmacist went to the expense of fitting out a shop only to be told she couldn't use the Pharmaceutical Benefits Scheme because she was 1.345 kilometres rather than 1.5 kilometres away from her nearest competitor. The Harper Review was told a much needed medical centre at Ingham in North Queensland was all set to go until an existing pharmacist moved to a boatyard within 1.5 kilometres of it preventing it from incorporating the pharmacy that was needed to make it a commercial proposition.

The more important effect of the location rules to protect pharmacies from price competition and from competition for the government payments that make up over half of pharmacies' income. Harper says if there are areas of Australia left unserved after the location rules go (as there are now in Indigenous areas) the government should consider allowing doctors to dispense medicines themselves.

It's far from true that Australian pharmacists support the restrictions. The Pharmacy Guild of Australia represents only the the 4000 who own pharmacies. Another 20,000 are locked out of ownership and forced to work for those who got in early. These "employee pharmacists" are represented by Professional Pharmacists Australia which supports a review of the location rules and has incidentally asked the Audit Office to conduct a complete audit of all public money handed to the Guild.

The Audit Office had a brush with the Guild just last month. In its report on the Guild's funding agreement with the government it didn't know what to make of an organisation it described as variously: an industry association, a publicly funded administrator at times acting as an agent for the department of health, a recipient of government grants, an owner of businesses selling products to pharmacies, and an advisor to the health department through its membership of boards.

The Community Pharmacy Agreement agreement pays the pharmacies to do the things many of us might have thought they did routinely, such as dispensing drugs and keeping electronic records. Its annual cost has climbed from $546 million in 1991-92 to $3.087 billion in 2013-14. Not that you've seen this in the budget papers, where it is lumped in with the cost of the Pharmaceutical Benefits Scheme. The Audit Office had to work it out itself. Its report found the health department kept no formal records of its negotiations with the Guild ("not consistent with sound practice"), paid it $31.2 million over five years to administer the agreement (some of it without informing the health minister), and was unable to get data from it about how much its members actually paid for the medications they sold.

It would be easy to get the impression pharmacy owners have access to government funds and government protection on a scale undreamed of by other industries now that the car industry is departing. It would be easy the get the impression that the comments about record keeping and financial management reflect badly on the then head of the department of health Jane Halton, who now runs the department of finance. It would be easy to get the impression that something has to give. Harper has given it a push.

In The Age and Sydney Morning Herald

Related Reading

. Want a pill that will make you rich? David Leyonhjelm, Australian Financial Review, September 19 2014

. A prescription for privilege, Terry Barnes, June 16, 2011

. A prescription for pharmacy reform, Terry Barnes, Policy Summer 2011-12

. Harmacy: The Political Economy of Community Pharmacy in Australia, David Gadiel, Centre for Independent Studies, 2008

Related Posts

. Medicare. What would charging for a previously free visit to the doctor achieve?

. It isn't even health insurance

. Do nations that spend more on health care live longer?

Sunday, April 05, 2015

This Easter give thanks for penalty rates, they keep us human

Have you heard about the member of parliament who couldn't find a bottle shop open on Good Friday? He blamed penalty rates. The real reason was Sydney's licensing laws.

Penalty rates get blamed for almost everything these days, which is odd because they've been around for 100 years. The Chamber of Commerce and Industry wants businesses that are closed over Easter to put signs in their windows saying it's because penalty rates are too high. If they are open it wants them to put signs in their windows saying they are employing fewer staff than they would like because penalty rates are too high. As it tells employers on its website: "There is a poster for either scenario relevant to your business."

MasterChef George Calombaris wants us to believe they are making his restaurants uneconomic. Yet in the past five years spending at restaurants and cafes has climbed 36 per cent. Other retail spending has climbed only 18 per cent. Employment in food service establishments has grown at twice the rate of other employment.

When presented with these sorts of facts celebrity chefs and employer representatives change the subject and say that things are different these days - most Australians no longer go to church and the distinction between weekends and the rest of the week is blurring.

They are right. Penalty rates were introduced for "evenings, weekends and public holidays to be the time when friends, families and social groupings, however constructed, are able to get together" in the words of the old Industrial Relations Commission. We no longer seriously socialise on weekends. The latest time-use survey finds we only spend only 1 hour per weekend socialising, down from 3 hours in the early 1990s. Our time spent shopping has doubled.

But there are other reasons to believe that penalty rates are more important than ever...

Penalty rates penalise employers for rostering people to work outside standard hours. In earlier years it didn't much matter if one member of the household worked outside standard hours. There was typically only one earner in each household, almost always the man. If that single earner was made to work at night or on weekends it wouldn't much harm his ability to get together with his wife. She would be at home whenever he was at home.

Not any more. These days if one partner works outside standard hours and the other works within them the penalty is real. Economists use the term "co-ordinated leisure" to describe what's at risk. The Melbourne band Weddings Parties Anything used lyrics:

Late at night when I come fumbling for my keys, the house is dark and all is quiet, get into bed, it is so hard for me to please, you're barely hours away from work, and you're so tired.

Australians who complain about penalty rates are often not themselves required to work unsociable hours. Assistant Infrastructure Minister Jamie Briggs told a business audience last year he was unable to dine at his favourite restaurant on New Year's Eve because penalty rates forced it to close. I phoned his office on Good Friday. He wasn't there.

Reluctant though we might be to admit it, there's a class element to complaints about penalty rates. The people who complain about them are those least likely to be forced to work at night or at weekends. The people who serve those people at night and on weekends are often lower paid (without the penalty rates) and less educated.

There's no doubt that we need retail workers, nurses and hospitality and emergency service workers to stay on duty after the rest of us have gone to bed. But to act as if we are in a 24-hour world where there's no longer any penalty attached to working non-standard hours is to invite the breakdown of those standard hours altogether. It's to invite employers to roster on all of us at all hours, making co-ordinated leisure and co-ordinated sleep almost impossible.

Easter is one of the few times most of us are guaranteed co-ordinated time off. Many parents stagger their annual leave with one taking four weeks off in one part of the school holidays and another taking four weeks off in another in order to try to cover the entire 12 weeks. Even for the non-religious and the non-Christian, Easter has become sacred.

This year Victoria joined NSW in making Easter Sunday a public holiday in addition to Friday, Saturday and Monday. It's important. It matters more than whether or not we are able to dine out.

In The Age and Sydney Morning Herald