Join us for a live Q&A as I discuss our political system with the Founder of the New Liberals Victor Kline. Is it possible to change the current power structure and influence outcomes? You can ask a question live.
It appears that scientific bush fire experts have been warning for several years that a catastrophe would be coming and yet these warnings have not been heeded by governments or their bureaucratic officials.
Why is that, and what does it tell us about Australian society? John Adams and Martin North discuss.
Is this also true of impending financial disaster?
A deeply philosophical discussion with Adam Stokes about how we see the world. Perhaps one of my most important posts ever…
Prepare for some mind-stretching conversations about how we look at the world and what it means for comprehension and analysis (and why people often ignore new concepts and ideas).
Hi a quick update. We have been having intermittent issues with our blog where people trying to access the site get a dialogue from WordPress redirecting to wp-admin/install.php. A bit disconcerting to say the least!
This error was created by having more users on the blog than the SQL server could handle (a recent WordPress update increased the memory usage). So our blog was not compromised, and all content is safe. Phew.
First, thanks to all those who alerted me to this issue, including via social media, I really appreciated this, as it helped me deal with the issue promptly.
Second, we are working on a fix. My ISP has upped the memory on the server, and we increased the capacity but its still happening from time to time. For some reason the SQL query count has suddenly spiked, and there is a limit in each hour period, so its worth checking back later. We have raised a ticket, and hope to get a permanent fix soon. Meantime, the main DFA site still works at http://www.digitalfinanceanalytics.com/ if you want to contact me, or review our other content.
Third, the increased traffic highlights the interest in the DFA content, which is gratifying. Thanks for your interest. We will fix it as soon as we can.
Apologies for any inconvenience caused! We will now get back to creating more great content!!
The NZ Reserve Bank is warning of what appears to be a scam email sent to businesses in the financial sector. The scam email, purportedly from a Reserve Bank staff member, encourages recipients to click on a link to view “New Transaction Guidelines”.
The email was not sent by the Reserve Bank, and clicking on the link could potentially expose the recipient’s computer to a virus. Visit www.scamwatch.govt.nz for more information about how scams work and how you can protect yourself.
Amid the outcry over David Cameron’s tax affairs is the UK prime minister’s intervention in 2013 to block EU transparency rules regarding offshore trusts. It was decided that trusts should not be held to the same standards as companies when it came to making the end owners and beneficiaries publicly known.
But now the Panama Papers raise important questions as to whether trusts ought to be more open to public scrutiny. A major reason for this relates to fairness when it comes to paying taxes. Blockchain may provide a solution to this problem, enabling trusts to be more transparent, while ensuring the security of their holdings, too.
Trusts are often highly complex legal arrangements; but they tend to work on the same fundamental basis. First conceived many hundreds of years ago, trusts provide a unique method of property management. This uniqueness relates to how wealth is used, and relies on the separation of beneficial ownership from the responsibilities of property management that come with holding legal title.
Trusts come in both public and private forms. But their history points to an intimate desire for individuals and families to be able to preserve their wealth and, importantly, pass it on to the next generation.
One popular story of how trusts came into being involved the Crusaders of the 11th and 12th centuries who, before leaving to fight in the Middle East, arranged for their land to be tended and managed by a friend in trust (a trustee), on behalf of their family (as beneficiaries). This method of property management and transfer had not previously been recognised by Common Law, which viewed the friend as taking the land absolutely when given charge of it. But Equity, at the time a separate body of law in England and Wales, saw things differently.
David Cameron’s shares in an offshore fund were kept secret.Dan Kitwood / PA Wire
Based on fairness, Equity developed rules that protected the beneficial interest of the family, while at the same time applying strict fiduciary duties and obligations of trust and loyalty to the friend. This meant that the friend had to look after the property as they had been directed to by the Crusader.
Trusts now appear in the form of international commercial investment and trade vehicles; public and private pension funds; and charities, to name but three of the more economically significant. Yet those same foundations and consensual principles between the Crusader, the friend and the family fundamentally remain.
This means that trusts conform to traditional privacy models found elsewhere in banking and finance, insofar as they shield from public view the identities of the objects of the trust, as well as the nature of many of the trust’s investments and transactions. It is primarily in regard to where this “shield” is positioned that greater levels of transparency apply on the blockchain.
Smart contracts
As part of some recent research, I have been considering how blockchain technology (most famous for its role in the cryptocurrency Bitcoin) and other legal-like processes that blockchain facilitates, namely computer programs called “smart contracts”, might be mapped onto trusts law and trusteeship.
The key to the question of whether or not blockchain can make trusts more open to the public lies in its fundamental characteristics. Blockchain is essentially a peer-to-peer, distributed ledger system that is able to register information in an immutable way. This could take the form of a register of legal titles to property and beneficial interests, both of which are central to trusts.
In this sense, blockchain is a highly reliable witness regarding the information it deals with. Furthermore, as part of the process of adding or registering information on blockchain, that information is announced publicly, providing an entire, transparent history capable of public scrutiny. This does not mean that the blockchain is not private – cultural as well as commercial sensitivity around the privacy of financial information can still be maintained – but it is achieved in a different way.
Using two sets of encrypted keys, one public and one private, to validate transactions provides the possibility for secure, private spaces that nevertheless remain in public view. Unlike other methods that maintain privacy of investments and transactions by shielding the entire process from public view, including the identities of individual parties, the blockchain breaks the flow of information in another place: by keeping public keys anonymous.
So a trust could take the form of a “private space”. More specifically what is legally defined as a trust could be mapped onto the blockchain processes behind that “private space”. This would create, what I call a “smart trust” – a secure private space, yet one primed for public scrutiny.
The potential of the blockchain as described here is something of a “third-way” to existing privacy models. Because trusts come in many shapes and sizes, blockchain “smart trusts” would undeniably suit some types more than others – it is not a case of one size fits all. While trusts have a very long history, the blockchain has a very short one. It will take time to understand if and how the two might work together. But if greater levels of honesty and transparency are needed, the blockchain could provide an answer.
Author: Robert Herian, Lecturer in Law, The Open University
As part of its innovation agenda the Coalition government is offering a tax offset of 20 cents for every dollar invested into a startup, as well as an exemption from capital gains tax for up to 10 years. However, it has emerged that this incentive could be limited to only ‘sophisticated’ investors, defined as those earning more than $250,000 per annum or having a net worth of more than $2.5 million.
Placing this restriction on startup investment could potentially disadvantage a key group of seed capital providers namely family and friends or informal investors. Family and friends provided $66 billion of startup capital to emerging ventures in the United States This is about three times more than either venture capitalists or professional angel investors.
Many of today’s largest listed US companies took seed capital from informal investors. For example Whole Foods Market, a $10 billion American organic food company, was started with founder savings and capital provided by family and friends.
These investors each provide anywhere between $1,000 to $30,000 in seed funding, yet many of them would not qualify as sophisticated investors under the Australian government’s definition.
Australian startups face serious challenges in accessing capital at almost every stage in their growth cycle. In particular, difficulties in accessing seed capital, needed to help turn an idea into an operating business, appears to be a critical road block for many aspiring Australian entrepreneurs.
For example, one in five startups cite restricted access to capital as a major barrier to innovation.
So where can startups access very early stage capital? It appears the sources are limited. The latest data from the Australian Venture Capital Association shows that very few seed investments are made in Australia by venture capitalists.
Further, the angel and incubator community is only just emerging, with only about 12 active groups across the country. This further points to the important role that informal investors can play in filling the capital cap that occurs at a venture’s seed stage.
It is true that informal investors stand to lose a greater proportion of their wealth in comparison to high net worth individuals when investing in startups. However another important innovation agenda reform, equity crowdfunding whereby ordinary mum and dad investors can take an equity stake in a startup through an online portal, would allow them to diversify their risks across many ventures, beyond those in which they have personal connections.
With this in mind, there are several reasons to believe that encouraging, rather than penalising small unsophisticated investors, is an important step to help young Australian startups to grow.
Family and friend investors have a personal connection with the founder, and typically will invest out of loyalty, trust and a belief in the founder’s ability. Such relationship characteristics are difficult to replicate with professional investors, who will often price down a company’s value to account for the possibility of moral hazard or unscrupulous founder motives.
In fact, if a start-up can grow through family and friend investments, often venture capitalist and angels become more inclined to offer follow-on funding, because the fact that informal investors have put their trust (and money) in the founder is a strong signal of the entrepreneur’s integrity and ability.
Bringing on formal or sophisticated investors too early can also stifle innovation. Venture capitalists are certainly not patient. They look for an exit in five years. Angel investors are a little more patient, but still look at a 10 year time frame. Often developing an innovative business can take much longer. For example, Glenn Martin the founder of Martin Jetpack, a Kiwi startup that listed on the ASX last year, first started work on the jet pack in 1981.
Further, a slower start to a venture is often a safer start, where the entrepreneur can take a “try it, fix it” approach and has ample opportunity to correct errors from poor decisions. Informal investors are more likely to be hands-off in their investment approach and thus far more likely to tolerate such an uncertain environment.
On the other hand, professional investors are much more hands-on and may prefer the safe proven routes learnt from previous investments, when in fact an experimental try-it, fix-it approach may be more conducive to innovation.
In order to ensure that our taxation system creates incentives that promote a successful startup ecosystem, careful consideration should be given to how early stage ventures are developed in other successful startup environments.
The Australian government’s efforts to recently secure a “landing-pad” in San Francisco’s highly successful RocketSpace hub, is exactly the kind of initiative that will help Australians learn how to foster a more vibrant domestic startup ecosystem.
While this will not directly address the seed capital gap, helping founders to access valuable networks and to develop their ideas through co-working with others, will certainly enhance their future capital raising capabilities.
Author: Jason Zein, Associate Professor, UNSW Australia
A cornerstone of this consultation is the definition of an innovation company. The Government is keen to hear from stakeholders on the appropriate definition of an innovation company and how the eligibility principles and criteria can leverage off existing industry concepts and business practices.
On 7 December 2015, the Government announced the National Innovation and Science Agenda (NISA), including new tax incentives for early stage investors.
The tax incentives will provide concessional tax treatment for investors through a non-refundable tax offset and a capital gains tax (CGT) exemption on investments that meet certain eligibility criteria.
The tax incentives are designed to encourage investment into Australian innovation companies (innovation companies) at earlier stages, where a concept has been developed, but the company may have difficultly accessing equity finance to assist with commercialisation. Separate initiatives have been announced relating to investment at later stages, including reforms to early stage venture capital limited partnerships (ESVCLP) and venture capital limited partnerships (VCLP). These separate reforms will apply from the 2016-17 income year.
The tax incentives for early stage investors measure is being developed in a way that is cognisant of these different stages of financing and the availability of other initiatives specifically targeted at companies at a later stage of development. The Government is mindful that innovation companies beyond a certain size should still be able to benefit from Australia’s existing venture capital regime.
The approach taken for the incentives has been informed by the work of other jurisdictions including the United Kingdom and Singapore, however the approach that has been developed is specific to the Australian economy and adapted to suit the Australian tax system. The Government is developing a principles-based approach to the design of the legislation for this measure that will help to ensure that the incentives continue to encourage investment into the future as technologies and business activities change.
OVERVIEW OF THE NEW TAX INCENTIVES
These incentives will provide eligible investors with a 20 per cent non-refundable tax offset for the amount paid for newly issued shares in an innovation company, where the amount is paid either directly to the innovation company or indirectly through a qualifying innovation fund. An investor can invest in innovation companies; innovation funds; or into both. As the offset is non-refundable, it will only be of immediate benefit where the investor has a tax liability. However, where an investor cannot use the tax offset in the relevant income year they may carry it forward to use in a future year. The tax offset will be available to both residents and non-residents.
There are a number of ways to define an innovation company. Adopting a principles-based approach will provide a conceptual framework and ongoing flexibility. This, in turn, will be supported by specific eligibility criteria (safe harbours or gateway criteria) to provide greater certainty for potential investors and innovation companies. It is also anticipated that specific exclusions will apply to activities that do not align with the policy intent of the tax incentives.
An eligible innovation company must meet the following criteria:
• was incorporated in Australia during the last three income years;
• had assessable income of $200,000 or less in the prior income year;
• had expenditure of $1 million or less in the prior income year; and
• is not an entity listed on any stock exchange.
Investors will receive a non-refundable tax offset of up to $200,000 (on an affiliate-inclusive basis) for investments (direct or indirect) in eligible innovation companies in an income year. This means that for investments up to $1 million, investors receive the full 20 per cent non-refundable tax offset. Where the offset is carried forward and further eligible investments are made, the offset that may be claimed in any one year is capped at $200,000. Investment amounts greater than $1 million in an income year do not increase the amount of the offset available. Investments over $1 million still benefit from exempt capital gains, see below. The cap applies on an affiliate-inclusive basis in order to prevent entities entering into arrangements to circumvent the cap.
In addition to receiving a tax offset, investors (including a qualifying innovation fund) will not pay any CGT on gains from the disposal of shares in an innovation company provided those shares are held for at least three years. This applies to both resident and non-resident investors.
Where shares are held for more than 10 years, any incremental gain in value after 10 years will be subject to CGT and deemed to be on capital account. In this situation, the entity receives a first element of the cost base (or reduced cost base) equal to the market value calculated on the tenth anniversary of the date of acquisition.
Capital losses will be unavailable for shares issues as part of these tax incentives for early stage investors. In place of capital losses, immediate tax offsets are available subject to the income year offset cap. In order to achieve this result, the investor will initially treat the acquired shares as having a CGT reduced cost base of nil.
Closing date for submissions: Wednesday, 24 February 2016
Many economically advanced countries are failing to fully enforce regulations on political party funding and campaign donations or are leaving loopholes that can be exploited by powerful private interest groups, according to a new OECD report.
Financing Democracy: Funding of Political Parties and Election Campaigns and the Risk of Policy Capture says that private donors frequently use loans, membership fees and third-party funding to circumvent spending limits or to conceal donations. Tightening regulation and applying sanctions more rigorously would help to restore public trust at a time when voters in advanced economies are showing disillusionment with political parties and fear that democratic processes can be captured by private interest groups.
“Policy making should not be for sale to the highest bidder,” said OECD Secretary-General Angel Gurría, launching the Organisation’s first report on political financing at a meeting of the OECD Global Parliamentary Network, a forum for legislators from member and partner countries to compare policies and discuss best practices. “When policy is influenced by wealthy donors, the rules get bent in favour of the few and against the interests of the many. Upholding rigorous standards in political finance is a key part of our battle to reduce inequality and restore trust in democracy,” he said.
Many countries struggle to define and regulate “third-party” campaigning by organisations or individuals who are not political parties or candidates, enabling election spending to be channelled through supposedly independent committees and interest groups. Only a handful of countries have regulations on third-party campaigning, and these regulations vary in strictness.
Globalisation is complicating the regulation of political party funding as multinational companies and wealthy foreign individuals are increasingly integrated with domestic business interests. Where limits and bans on foreign and corporate funding exist, disclosure of donor identity is a vital deterrent to misuse of influence. While 17 of the 34 OECD countries ban anonymous donations to political parties, 13 only ban them above certain thresholds and four allow them.
Even when donations are not anonymous, countries have differing rules about disclosing donor identity. In nine OECD countries political parties are obliged to publically disclose the identity of donors, while in the other 25 OECD countries parties do so on an ad-hoc basis.
Only 16 OECD countries have campaign spending limits for both parties and candidates. While such limits can prevent a spending race, challengers who generally need more funds to unseat an incumbent may be at a disadvantage in the other 18 countries.
Finally, a lack of independence or legal authority among some oversight institutions leaves big donors able to receive favours such as tax breaks, state subsidies, preferential access to public loans and procurement contracts.
The report recommends that:
Countries should design sanctions against breaches of political finance regulations that are both proportionate and dissuasive.
Countries should strike a balance between public and private political finance, bearing in mind that neither 100% private nor 100% public funding is desirable.
Countries should aim for fuller disclosure with low thresholds, while taking privacy concerns of donors into consideration.
Countries should focus on enforcing existing regulations, not adding new ones.
Institutions responsible for enforcing political finance regulations should have a clear mandate, adequate legal power and the capacity to impose sanctions.
Political finance regulations should focus on the whole cycle – the pre-campaign phase, the campaign period and the period after the elected official takes office.
You can read the full report here, including case studies of Brazil, Canada, Chile, Estonia, France, India, Korea, Mexico and the UK.
