By Joe Montero
The stock exchange has stopped the trading of Ten Network Holdings shares and the company has gone into voluntary administration. Continue reading Murdoch circles over the Ten Network
Category Archives: Economy
Australia’s billionaires and their connection to government
By Joe Montero
An article written by Peter Martin, economics editor of the Age (28 May 2017) is an eye opener for anyone not familiar with the connection between government and Australia’s billionaires in Australia. The practice is so rampant that Australia ranks as one of the worst in the world.
What is left out is the connection that this has with the rise of the finance industry over the last 30 years.
Martin quotes from the work of professor Paul Frijters and economist Gigi Foster, who examined the Rich 200 List for the Australian Economic Review in 2015 and recorded then in a book coauthored by Frijters and Cameron Murray called Game of Mates.
“over 80 per cent of the wealthiest Australians have made their fortunes in property, mining, banking, superannuation and finance generally – all heavily regulated industries in which fortunes can be made by getting favourable property rezonings, planning law exemptions, mining concessions, labour law exemptions, money creation powers and mandated markets of many stripes”.
The book suggests that seeking “favours, be they planning approvals or the right to build casinos or toll roads, is what makes Australia go round. Certainly, it makes Australia’s job market go round. Local council planners move into positions with developers, state and Commonwealth government ministers take up positions with companies they used to regulate and former Treasury officials sit on the boards of private banks”.
Martin describes this as a particularly Australian way to make money. Unlike people like Larry Page and Sergey Brin did with Google, Steve Jobs did with Apple, and Bill Gates did with Microsoft, who did bring something new to the world, these people do no such thing.
They made their money by doing things that anybody could have done and they were able to do so, he says, because they had the right connections. Government provides the opportunities.
Peter Martin labels this as “a particularly Australian way to make money”, and “where Australia has more in common with Columbia than with the United states”.
A study by two United states economists Sutirtha Bagchi and Jan Svejnar used the international Forbes Rich List and an extensive search of newspaper reports to estimate the proportion of
Based on the data, they pointed out that four countries stood out and they were Colombia with 85 percent of billionaires being politically connected, followed by India with 66 percent, Australia with 65 percent and Indonesia with 64 percent.
Martin quite rightly points out that this arrangement makes it likely that there is little threat of billionaires being taxed more in Australia, any time soon.
There is another part to this story. Australia’s billionaires are in partnership with much bigger entities. Those involved in the development game need to raise considerable capital. They do not finance out of their own pocket, but raise the funds from other sources from the banks. This applies even more in the mining industry.
All roads point to the banks. They are where the collective store of investment funds is held and released for a percentage. The point is that they create debt and this debt gives them enormous power. For instance, you could be a Gina Rinehart raising the capital to start up a new mine. The bank supplying it has the leverage to impose conditions. It can recall the money and this can make life difficult for the borrower. Although the billionaires might be in a better position than the average punter, they remain dependent.
This means the banks must be implicated, in whatever level of corruption there is. More so, when government itself depends on raising funds from the same banks.
According to a 2012 report by the International Monetary fund, major banks are highly interconnected. Credit Card Compare reported that they not only transfer funds between them, but shared the same four major shareholders. They are nominee companies controlled by the American banks (Citibank and JP Morgan) and a major British bank (HSBC). There is Also National Nominees that acts on behalf of less clearly defined clients, most of which are registered in tax free havens.
The same banks own large parts of most companies registered on the Australian Stock Exchange. This gives a small group much more power than most would ever suspect. A power that has a global dimension. This is critical. Because it is not likely that a connection with government for favourable treatment would exist without their involvement.
Australia is at the top of the charts in something else and that is the most deregulated financial sector of any comparable economy. The assertion being made here is that there is a connection between the giving out of government favours and the deregulation of finance. If you want to get rid of one, you have to get rid of the other.
Among other changes, deregulation meant that government had less capacity to regulate the monetary side of the economy and to use its control to divert funds for its own needs.It has been a major pusher to privatise government concerns to secure funds to balance the books and creating a major potential for generating close business contacts between government and the business sector
Banking became riskier with the loosening of controls over reserve and liquidity ratios, the rise of new financial institutions and greater exposure to the global financial system, which meant a more unstable exchange rate and subjection to the whim of major global investors and institutions.
Reduction of government control meant that credit could no longer be targeted towards priority areas. It quickly became a free for all. Government could no longer issue directives that would compel the banks to behave in a given way.
Deregulation has created a recipe for corruption.
Documents reveal Banks losing battle in image repair
By Joe Montero
Australia’s major banks are having a rough ride, not in terms of the profit they are making, but in the way they are seen to operate.
Never has the image of banks been so low, regarded by the average Australian as greedy, overcharging, providing poor quality, making too much money and enablers of corporate the tax dodging industry. This is the reason why proposals for an inquiry are so popular.
Evidence shows that the banks are getting extremely worried about this public perception of them. They have spent almost $7 million in a year trying to fix their image and ward off pressure for an inquiry. The public relations campaign has been a spectacular failure and this is adding considerably to the worry.
The problem is that there is substance to the accusations and no amount of soft sell is going to change this. Only change will.
So serious is the feeling against the banks that politicians are compelled to publicly distance themselves. This is part of what is behind the the $6.2 billion tax on the banks in the May budget, even if it going to be paid by the customers. at heart, the government remains sympathetic to the banks and is working hard to combat pressure in parliament for a Royal Commission. It must also cover itself politically, using diversion and pretending it too is concerned about the excesses of the banks, to respond to a deep sense of betrayal, by the government’s failure to date to take any significant action.
It is even talking about imposing more regulation and accountability measures.
Leaked documents, which include agenda papers from several Australian Bankers Association meetings and a new battle plan drawn up in April, by the Australian Bankers Association’s (ABA) public relations consultants, Newgate, highlight an acute awareness inside the sector about its image problem and frustration at being unable to combat it.
An ABA council agenda warned in December that there were two scenarios the industry faced in the “coming months and years”.
The first was “death by a thousand cuts from the current government, which has made it clear that, so long as banks remain a political issue, it will continue to make new announcements against the banks, including imposing new regulations and making further demands for banks to fund government initiatives”.
This refers to the extra powers and resources granted to the regulators in 2016 for which the banks were made to pay.
The second scenario was “a royal commission initiated by a Labor government”.
“The ABA’s assessment is that there is an 80 per cent chance of a royal commission into the industry in the next two to three years,” the ABA agenda says.
“The two scenarios are not mutually exclusive and both could play out.”
It says the banking industry’s political problems were being “compounded by a growing reaction in Australia against big business and those seen to profit from a political and economic system that many Australians feel does not benefit them.”
The papers detail that the ABA had already spent $2.6 million on a six-point plan launched in April 2016 designed to protect consumer interests, increase transparency and accountability, and build trust and confidence in banks.
The December agenda confirms a six-point plan to convince Australians that the banks were taking measures to protect consumer interests, increase transparency and accountability and build public trust and confidence in the banks had fizzled.
So, it was decided in January 2017 to add another three measures and then launch a Better Banking campaign, which, at the cost of a further $3 million, aimed to “educate key stakeholders about industry-led initiatives to deliver better products, services and culture with the banks”.
In April this year the ABA spent another $1.25 million for Newgate to develop a 14-point plan, which was to guide the new ABA chief executive, the former Queensland Labor premier Anna Bligh.
Despite the new measures, Newgate warned that “there is a lot of evidence that political momentum will continue to build against the industry” and for significant remedial action following the conclusion of “numerous parliamentary committees “. The banks have been told to expect hardening political rhetoric against them.
The ABA has also commissioned former ASIC executive general manager Phil Khoury to conduct a review of the Code of Banking Practice, which sets standards of good conduct for banks, and commissioned former Public Service commissioner Stephen Sedgwick, to conduct a review of commissions and payments made to bank staff and third parties. They have also appointed customer advocates to help when things go wrong.
They are worried and have good reason to be. Australia will continue to demand action to clean up the operations of the banks until it becomes a reality.
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Property crash fears downgrade Australian banks
By Joe Montero
Fears of an Australian crash in property prices have been around for quite a while. Regardless, property prices have continued to rise.
But in the last month or so, they have stabilised and even gone down a bit in Melbourne and Sydney, the two places that are at the heart of the price bubble. Nevertheless, they are not crashing, as they have in some other countries.
The reason for this is that Australia has some unique factors that makes our housing bubble a special case.
Because of the existence of a generous negative gearing provision, housing stock has been turned into an attractive investment option, not so much for the home buyer, but for the corporate buyer seeking a higher return in a lack lustre investing environment. Consequently, it is not those buying a home to live in that are keeping up the price. It is the corporate investor, able to do this, thanks to the generous handout of taxpayers’ money,on the basis of recompense for loss of potential rental income. This is guaranteed to keep up the price. And it has gone up by 250 percent since the 1990’s (OECD figures)
A second consequence of negative gearing is that for the corporate investor with a large stock, it is more profitable to take the property out of the rental market. This is why Australia’s two biggest cities have about 80,000 vacant residential properties each. This is replicated proportionally around the country, creating an artificial shortage that pushes rents up. This also buoys up property prices.
corporate investors also enjoy write offs on the Capital Gains Tax.
Buying residential property has become an attractive proposition in its own right and it is useful as a means to transfer funds from other business activities to minimise company and personal tax obligations.
A further factor is the nature of Australia’s financial market. It is heavily dependent on investment from overseas. This means that it reacts to changes in the global financial market and the national financial markets from which this investment comes from. The two main ones are the United States and Great Britain.
If the investment climate in these countries worsens, investment funds will turn up in Australia, which tends to run on opposite short and medium term cycles. Some of it turns up in the housing market. The greatest part of corporate investment in Australian housing property comes via companies registered in Singapore, but using funds that traditionally mostly originate from Great Britain. Some up to date research is needed on this. Nevertheless, enough is known to see the pattern.
Investment in assets that come with the guarantee of government payouts is attractive to foreign investors in an uncertain global market and an Australia that for now is relatively stable.
Without these factors coming into play, it is doubtful that property prices would have kept on rising for so long. It still will not last forever, because there is one inescapable fact. Sooner or later, the price becomes too high for too many people to afford and the market will start to cave in. We are close to this point, and this is why it is starting to get a little shaky.
Enough for the ratings agency Standard and Poores to downgrade Australia’s financial sector, because of a belief that “economic imbalances” caused by soaring private-sector debt and property prices, are leading to a potential precipice.
“Consequently, we believe financial institutions operating in Australia now face an increased risk of a sharp correction in property prices and, if that were to occur, a significant rise in credit losses,” the agency wrote.
High housing costs is the major reason why Australia’s personal debt level is the highest in the world. This is not sustainable. The longer the property bubble continues, the large the level of personal debt and this suggests that a crash could be in the making.
The Standard and Poores downgrade follows a March report by OECD warning that soaring house prices and ever-rising household debt had exposed the Australian economy to “extreme vulnerability”.
The rating downgrades applied to 23 financial institutions, including AMP, Bank of Queensland, and the Bendigo and Adelaide Bank.
The notable exceptions were the ‘Big Four’ (AA-) and Macquarie (AA), which kept their ratings, but only because the agency presumed they would be bailed out by the government in the event of any catastrophe.
The financial institutions are on the one hand heavily exposed to risk with the level of debt tied up to housing loans. They are even more exposed with the level of debt owed overseas. The collapse of the real estate bubble could place their ongoing survival at risk.
As defaults multiply, This would mean the spread of the crisis through the whole economy.
Bernie Fraser and John Edwards say increase taxes on wealthy
The following from Elysse Morgan (ABC 17 May 2017) shows just how widespread has become the rejection of increasing the income of those at the top, at the cost of those lower down, as the means to economic recovery has become. When people with backgrounds like Bernie Fraser and John Edwards feel compelled to speak out, there may just be something in it. They go so far as to support increasing taxes for the rich.
Trump tax reform to benefit the richest and himself
By Joe Montero
According to the US Treasury secretary, Donald Trump is about to announce his new tax cuts and has billed it the “largest tax reform” in US history. Continue reading Trump tax reform to benefit the richest and himself
It is not wages but other factors are driving up business costs
By Joe Montero
Wages are not a major cause of rising business costs. This is a bold statement in the face of all the rhetoric claiming the opposite to be true. This does not make it less true.
One qualification must be made. Wages do figure highly in small business. But this diminishes as the size of the operation increases. What follows concerns big business. The focus is important because big business is the most decisive part of the Australian economy.
Note that this is not an exhaustive examination, but a brief sketch of what goes on.
Looking back over history shows that real wages tend around what it costs to raise an average family. This constant, was recognised by the landmark Harvester case in 1907, and regardless of whether it admitted or not, the truth of it shown the need of the average household to use all of its income to maintain its accustomed position. If real labour costs remain relatively constant, they are not likely to be the cause of rising real costs over the economy as a whole.
From time to time there is some departure from this rule, depending on the relative strength of the unions and employers and the short-term labour demand and supply factors. But over time, the norm asserts itself.
From the view-point of a business, operations are based on the overall costs of production. This does involve labour costs. It also contains the costs of providing the premises and equipment and materials needed to operate the business, plus taxes and other impositions placed by society. Only the first two are going to be considered here, because they are the most important.
Labour differs from the others in that the bigger the volume, in terms of units over a specified time period, the less the labour cost in each. Put another way. If one wage produces 1 unit in an hour is made and if this is changed to produce 10 in the same hour, the cost of labour has dropped to one tenth of what it was. It is the reason why the cost of labour is called variable capital.
Conversely, the cost of the premises and the equipment (other less important inputs are left out for ease of explanation) used, cannot be spread out over a larger volume in the same way. The cost remains the same for each unit, regardless of the quantity. This is why economists call this fixed or constant capital, depending on the school of thought. Increasing the volume of business increases the cost of this capital proportionally.
Fixed or constant capital has another property that differentiates it from variable capital. Investment in variable capital can be changed easily. The other capital cannot. The premises and equipment used come in precise units and at a certain point reach full capacity. Shifting to a new place to do business, redesigning it, or buying a new machine is expensive. Further expansion requires major new investment, which adds considerably to the costs of running the business. Times of rapid technological change add further to this problem.
The pressure to contain costs is the major driver for business expansion. More so, when the market is tight, because it is the smaller players that are most likely to fall off the perch. It is this that pushes forward the imperative for increased productivity. Increased productivity simply means spreading a given quantity of labour used over more units.
In an economy that is in truth shrinking and business opportunities with it, the tendency is to exploit labour to cover the rising cost of fixed or constant capital. Hence the drive to remake the labour market through the creation of flexible casualised work, cut wages growth and attack penalty rates. The real wage is falling in the present period. The degree to which this falls below the natural rate, marks the extent of a falling standard of living.
While some individual businesses may gain from this, in the aggregate it is another story. Putting wages below their natural real level contracts the economy further. This will translate into fewer business opportunities and a fall in the aggregate rate of profit. How this occurs is another story.
The final word is that rising costs is what is driving the call for assistance through less tax on business.
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Pensioners to be target of welfare card cut
By an age pensioner
A leaked federal government document shows the government’s intention to take concession cards from pensioners and it will cost an individual up to $49.10 per fortnight.
All welfare payments under $20.02 will be scrapped. Retirees who do not qualify for the full pension because of superannuation or assets, but receive the nominal amount, will not qualify for the health care card.
For retires, the cost of health, including prescription drugs can be formidable. These pensioners will also lose the pension rate car registration, license and council rates etc. Most of these people are not wealthy. Many have already had their pension cut via the recent change to the assets test and are in financial stress.
Some people on disability support and carers also face the loss.
Australian Council of Social Services (ACOSS) chief executive Dr Cassandra Goldie warned the government against welfare changes, saying Australia already has one of the most targeted systems of income support.
“Once again, this kind of proposal targets people on low and modest incomes to make savings,” Dr Goldie said.
It is extraordinary that as the exposure of the treatment of welfare recipients through Centrelink continues to unfold, the Turnbull government is going for yet another measure to raise funds from some of the most vulnerable Australians. The government chooses to ignore the evident public concern.
The suggestion that this is necessary to control the budget, convinces almost no-one. It is common knowledge that this comes at a time when the same government, refuses to act on corporate tax evasion and siphoning off funds to tax free havens. Practices that put a bigger hole into government finances that is saved by welfare cuts.
A good part of the reason for the demise of former treasurer Joe Hockey and why Turnbull replaced Tony Abbott as prime minister, was that they sighted the same target. Malcolm Turnbull promised then that his would be a more caring government.
There are a lot of Australian who feel let down by the betrayal of this promise.
Multinational tax dodgers are the real leaners
Nowhere is the impotence of politicians and regulators more costly than in their failure to stand up to multinational corporations dodging tax.
The Tax Office now publishes an annual list of Australia’s 1900 largest companies, which shows their revenue, profit and tax expense. Only 600 of the entities on this list actually pay income tax at the statutory rate of 30 per cent (bear in mind, these include trusts such as Sydney Airport whose members incur the tax liability).
More than 600 of the entities on the list pay no tax at all. That’s zero tax on $A330 billion worth of income: these are Australia’s real leaners, not our lifters.
The list is a good thing; transparency is a good thing. Yet there are serious deficiencies with this ATO data. The key cause of these deficiencies is the failure of companies to lodge proper financial statements.
To demonstrate this, we selected a couple of companies from the list at random and analysed their financial statements. These entities, the local offshoot of Wall Street banking giant Goldman Sachs and the nation’s biggest brewer SABMiller, show an income tax rate of 0 per cent over the past two years.
| Company | Total income | Taxable income | Calculated shortfall |
|---|---|---|---|
| Qantas Airways Ltd | $15.4b | $211.7m | $464m |
| Origin Energy Ltd | $12.2b | $0 | $366m |
| Lendlease Corporation Ltd | $8.7b | $0 | $263.8m |
| ExxonMobil Australia Pty Ltd | $8.4b | $0 | $253.9m |
| Glencore Investment Holdings Pty Ltd | $7.7b | $0 | $233.6m |
| EnergyAustralia Holdings Ltd | $7.3b | $0 | $219.1m |
| Australian Postal Corporation | $6.3b | $0 | $190.6m |
| Viva Energy Australia Ltd | $6.3b | $0 | $189.3m |
| Glencore Investment Pty Ltd | $4.9b | $108.1m | $149.1m |
| BHP Billiton Aluminium Australia Pty Ltd | $4.9b | $495m | $148.7m |
Shortfall is calculated with imposed ceiling of 90% on tax deductible expenses.
Goldman Sachs Holdings ANZ Pty Ltd generated $A634 million in annual total income. This holding company displays the usual signs of a tax-dodging multinational including:
- ownership through Hong Kong
- a subsidiary in the Cayman islands
- the creation of a new holding company at the top of the group followed by a mega-million-dollar return of capital
- related party transactions and balances with next to no disclosure of their financial effects
- misleading financial statements and disclosures provided to the corporate regulator, the Australian Securities and Investments Commission (ASIC).
For its part, SABMiller in Australia is six times the size of Goldman Sachs. It rakes in $A3.5 billion in total income via its surefire business model of selling beer to Australians, one of the world’s pre-eminent beer-drinking populations.
When we called SABMiller to ask if the company felt it was pulling its societal weight, we received this response:
In FY2015, our total tax contribution in Australia exceeded $A1.4 billion. This included both our own taxes and those we collected on behalf of the Australian government, such as excise and customs duty, goods and services tax and employment-related taxes.
Points to SABMiller for actually responding. Goldmans didn’t return calls. However, lumping in taxes collected for governments – beer excise, GST, payroll tax and so forth – is obfuscation when the subject of the story is corporate income tax.
How do they do it?
One of the tools of trade of the multinational tax avoider is keeping a low profile and keeping stakeholders, including the Tax Office, in the dark while maintaining the pretence that everything is kosher.
The financial statements of the holding companies of both Goldman Sachs and SABMiller in Australia are frankly useless. While claiming to follow the accounting standards, they conceal the true state of the financial affairs of the group.
Dozens of companies that formerly lodged proper “general purpose” financial statements quietly switched to the inadequate “special purpose” accounting regime in recent years. These “special purpose” accounts are a favoured device of the Big Four accounting firms.
With these financial statements, Goldman Sachs and SABMiller, and their auditor PwC, take the implausible view that a holding company that controls billions of dollars in assets is unaccountable to the public for the activities of the group, including its subsidiaries.
Both holding companies – and bear in mind eBay and a host of other multinationals do the same – have deliberately chosen not to file audited consolidated financial statements with ASIC.
The decision not to consolidate means there is no audit or assurance of accounting balances, which the Tax Office might otherwise rely upon in its enforcement activities.
In filing special purpose accounts, the directors of these holding companies are claiming that nobody other than their masters in the US and the UK are entitled to access audited financial information.
It is a hollow claim, but one ordained by the Big Four accounting firms, EY, Deloitte, KPMG and PwC. PWC, the auditor of SABMiller Australia, opines:
Our [2016 audit] report is intended solely for the members of SABMIller Australia Pty Ltd and should not be distributed to or used by parties other than SABMIller Australia Pty Ltd and the members.
If this is so, why does Australian law require that the financial report and audit report be made available for public consumption on ASIC’s database? Can PwC not be relied upon to conduct a statutory audit?
“It’s all legal,” is the catchcry. Yet Australia’s company law supposedly put a stop to non-consolidation by holding companies in the early 1990s following the corporate crash of Adelaide Steamships.
Nonetheless, the accounting firms have brought back the non-consolidation ruse for their billion-dollar multinational tax-avoiding clients. So it is now up to the government to change the law to make it clear: no loopholes, so Australian holding companies of multinationals with billions in assets or income must prepare and lodge audited consolidated financial statements.
Section 297 of the Corporations Act requires that financial statements give a true and fair view. SABMiller Australia reported income of $A0.0001 billion in its statutory accounts for 2015 but $A3.5 billion to the Tax Office. The difference is largely attributable to non-consolidation of subsidiaries in the financial statements lodged with ASIC.
ASIC could rule on this today and enforce the present laws by insisting on proper financial reporting. Or if amendments were required, legislation would be a simple process. All it requires is political courage in the face of powerful vested interests striving to conceal their true financial state of affairs.
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