Wednesday, August 10, 2016

Glenn Stevens lauded for preserving RBA independence from government

When it comes to legacies, the outgoing Reserve Bank governor Glenn Stevens will be remembered for guiding Australia through the global financial crisis and marring his record with a the burden of a recession.

Mr Stevens - who makes his final public speech in Sydney today - also navigated Australia through a once in a century mining boom but also the unwanted legacy of a real estate bubble fuelled by cutting interest rates to a record low of 1.5 percent.

While the jury is out on the full Glenn Stevens time in the RBA hot seat, one respected economist has lauded Mr Stevens for preserving the independence of the Reserve Bank by raising interest rates a week before the 2007 election.

John Howard’s Coalition was swept from office, heralding the ascension of Labor’s Kevin Rudd as Prime Minister.

Saul Eslake, a former bank chief economist now vice chancellor’s  fellow at the University of Tasmania, said Mr Stevens came under immense political pressure from the Liberal Party after raising the cash rate by 0.25 percent to 6.75 percent.

"I think Glenn Stevens' courage in these circumstances is another key achievement of his time during the decade at the helm of the Reserve Bank," Mr Eslake told The World Today.

"There are many in the Coalition who never forgave Glenn Stevens for that even though I doubt that his decision to lift interest rates had any impact on the outcome of the 2007 election.

"There were a number of Coalition members who from time to time would surreptitiously briefed the (Canberra) Press Gallery against Glenn Stevens."

Mr Eslake also cited media pressure with The Daily Telegraph in Sydney describing Mr Stevens as "the most useless banker in Australia" because of his strategy of hiking interest rates.

Glenn Stevens' preservation of the Reserve Bank independence of government was most recently demonstrated when the RBA board cut the cash rate on May 3, overshadowing the Federal Budget.

Despite the plaudits as Mr Stevens prepares to retire on September 17, there is mounting criticism that continuous rate cuts since November 2011 have fuelled an investment housing bubble in the eastern seaboard, in particular in Sydney and Melbourne.

"That's something that critics of Glenn Stevens' time in office - and of Ian Macfarlane before him - will probably point to as an arguable blemishes on their records," Saul Eslake says.

"But I doubt that anyone could really say that Australia's economy would have been materially better of as a whole if the Reserve Bank had maintained higher interest rates."

Mr Eslake agrees however the younger Australians have been locked out of the main markets and live in the hope of receiving an inheritance or winning Lotto.

"Yes. Those are regrettable trends. And I think Glenn Stevens would be at one with in saying that the trend has been regrettable."

Glenn Stevens will deliver his final speech titled "An Accounting" when he speaks in Sydney at an event hosted by the Anika Foundation and Australian Business Economists

Thursday, August 4, 2016

Digital disruption could rock workplace agreements, report warns

In a world of digital disruption with the likes of Uber and Air BnB, the focus is turning to how rapid changes to business and lifestyles could translate to the workplace.

A report out today looks at likely challenges to legal rights for both employers and employees given the move to contracting and more flexible work arrangements.

The law firm Corrs Chambers Westgarth says businesses, governments and not-for-profits need to consider how they can adapt to the challenges of a fast changing digital economy.

Partner John Tuck told The World Today that navigating the rise of the sharing economy will be critical for Australian businesses and their employees.

"The nature of the impact is going to be very dramatic change in the way in which services are being delivered," Mr Tuck said.

"Couple that with automation and artificial intelligence, you can see that we are going to have a revolution in the way that work is being undertaken in Australia."

Mr Tuck agrees a major challenge is ensuring that workplace flexibility is not perceived as worker exploitation.

"Yes. And I think that any responsible business is set up in a way that is lawful and that they take notice of the proper regulation."

In its annual workplace report, the firm singles out the scandal involving the retail chain 7-Eleven where some employees were underpaid and exploited.

John Tuck says the 7-Eleven example highlights social and legal risks for companies that fail to ensure worker rights are protected in a flexible economy.

"The challenge for employers of course is how do we ensure that laws are being followed and that does create issues," Mr Tuck said.

"A prominent brand, a known brand may well have to put in new governance structures to ensure that those laws are being followed.

After the 7-Eleven revelations by the ABC and Fairfax Media, both major political parties ramped up policies to bolster employee protections and to impose higher penalties for breaches.

But with the rights checks and balances, the report says workers in the new economy can adapt while maintaining industrial protections.

"The new generations are going to embrace the portability and flexibility of new work opportunities as opposed to looking back through the rear vision mirror," Mr Tuck said.

Key challenges for employers are ensuring enterprises agreements are honoured while independent contractors understand superannuation laws and workers compensation laws.  

While the report recommends workplace reform, it says the close election result means there is limited prospect of any significant changes in the near term.

Wednesday, August 3, 2016

Investors, depositors big winners from RBA rate cut

The decision by major banks not to fully pass on the Reserve Bank's official rate to mortgage borrowers demonstrates the power of big investors at a time of tighter profit margins, according to interest rate analyst.

But Peter Arnold, director of data at the financial services monitoring firm RateCity, says the move by the Big Four isn't surprising and proves that the interests of shareholders is now the number one priority for major banks.

"Protecting those margins, holding back money as equity is now very important. But as a borrower, you're the one who's paying the price here," Mr Arnold told the ABC's AM program.

"There'd be a lot of pressure from shareholders. The bank profits are a big source of income for super funds so the typical Aussie is benefiting in some regards.

"But the big investors are certainly a force to be reckoned with."

The changing priority for banks is in contrast to the past decade when Federal Treasurers including Peter Costello, Wayne Swan and Joe Hockey publically urged banks to pass on rate cuts in full.

Bank chief executives were routinely carpeted in public and private when official rate cuts were held back to protect profit margins.

When the Reserve Bank cut rates in May on federal budget day, three of the four major banks delivered the full rate cut to borrowers.

But yesterday, major banks passed on around half the official reduction with the National Australia Bank handing over just 0.1 percent of the RBA's 0.25 percentage point reduction.

Instead term deposit rates have been sweetened by the Commonwealth, NAB, ANZ and Westpac to ensure depositors - who are hurting from record low rates - keep their money with banks.

Peter Arnold says banks are under more pressure than ever given demands from institutional shareholders along with the Australian Prudential Regulation Authority (APRA) which now requires banks to keep more cash in reserve to deal with potential shocks.

As economists question the Reserve Bank's strategy in taking rates to record lows, there are still fresh memories of banks raising rates independently in the leadup to the global financial crisis when bank funding costs spiralled.

Mr Arnold warns borrowers could be exposed to the scenario of independent rate hikes again in the event of a global shock.

"That could certainly happen again, " Mr Arnold told AM.

"We've seen it before and it's happened this decade. We saw some months where the RBA didn't move and the major banks added 0.1 to 0.5 percent extra on to home loan rates."

While the major banks have held back the full RBA cut, smaller banks without shareholders are better positioned to pass on the full 0.25 percent to borrowers.

The former credit union Bank Australia was the first to move, opening the door for other borrowers to do the same.

Tuesday, August 2, 2016

RBA tipped to cut rates to new low but urged to keep rates powder dry

It's shaping up as a tight call but most economists think the Reserve Bank will cut interest rates to a new historic low this afternoon.

The majority of economists polled by Bloomberg are tipping a 0.25 percentage point cut to 1.5 percent as the RBA fights back against an outlook for slowing inflation.

If the RBA delivers on expectations, it will have cut the cash rate by 3.25 percentage points since November 2011.

But while money markets see a 70 percent chance of a rate cut at 2.30pm AEST, one economist is urging the RBA to keep its rates ammunition on hold to deal with potentially harder economic times ahead including a recession.

Annette Beacher, head of Asia Pacific Research at TD Securities in Singapore says now is not the time for the RBA to cut rates to deal with low inflation.

"While there is certainly a raft of expectations for the RBA to cut, we don't see any data or any situation in recent weeks and months to tip them over the line," Ms Beacher  told ABC News.

"Australia hasn't had a recession since 1991 and I do think the RBA would quietly like to keep some powder dry in case there is a real crisis.

"I think leaving a 1.75 percent cash rate in the bank might be sufficient powder for whatever occurs around the corner."

The Reserve Bank last cut the cash rate in May on fears about deflation, overshadowing the Federal Budget, in what was also seen as a close decision.

The Australian Bureau of Statistics released more evidence of soft inflation on July 27 with headline inflation up 0.4 percent in the June quarter and one percent over the year.

While headline inflation is well below the RBA's target band of 2 to 3 percent over time, the RBA watches core inflation with the trimmed mean measure rising to 1.7 percent over the year.

The RBA is also concerned about the rising Australia dollar which it has described as a “complication” in previous statements.

While it is lower today at 75.3 US cents ahead of the RBA meeting, it has been above 76 US cents after soft economic growth data in the US late last week and the reduced likelihood of a US rate rise this year.

Today's meeting is the second last for RBA governor Glenn Stevens who will chair his final rates decision in September before leaving the RBA on September 17.

Thursday, July 28, 2016

Tax Office warns retirees on dodgy tax avoidance schemes

Prospective retirees are being warned they could be risking their nest eggs by investing in illegal retirement schemes designed to dodge tax.

The Australian Tax Office is working to shut down what it calls a "significant" number of schemes that lure investors with tactics to minimise or avoid legitimate tax through complex "paper shuffling".

The ATO says the schemes are "artificially contrived and complex" and are usually connected with the management of a self funded superannuation fund or SMSF.

Deputy Tax Commissioner Michael Cranston told AM that taxpayers who adopt illegal schemes face "severe penalties" which could amount to 47 percent of retirement savings.

"What we're seeing is some taxpayers getting close to retirement and moving some of their businesses into these self managed super funds," Mr Cranston said.

"Then when they go into retirement phase they draw out the dividends and there is no tax. They are things they are not allowed under the law.

"If things are too good to be true, they're generally not right."

The ATO is targeting three schemes including the tactic of "dividend stripping" where dividends from shares in a private company are channelled through an SMSF to avoid tax.

In addition, the ATO is ramping up surveillance of "non commercial recourse borrowing arrangements" and "personal services income" arrangements that break tax law.

However, Mr Cranston says while prospective retirees are looking at ways to boost their retirement nest egg there is no relation to the federal government's proposed changes to superannuation tax concessions.

"This has really got nothing to do with government discussions around superannuation policy," Mr Cranston said.

The ATO has launched an educational program to alert investors and to help weed out promoters of what it calls "dodgy schemes".

"That's if somebody has tried to structure your scheme differently, if it does look a bit artificial, or things that you don't have to pay tax on that you don't have to any more.

"They're signals that you should check with another accountant or ask the ATO."

In addition to penalties, Mr Cranston says fines could amount to 47 percent of the earnings of any illegal scheme.