Tag: The Conversation

Super and personal tax tweaks will drive more people into the property market

From The Conversation.

Australia’s federal government clearly sees its program of annual reductions in the company tax rate as the core element in its plan for “jobs and growth”.

There is now a large – though by no means uncontested – body of evidence to support the contention that reductions in company tax rates can support faster rates of GDP growth and higher wages. It does this by stimulating higher levels of investment and hence higher levels of labour productivity.

But there is very little evidence supporting the favouring of small businesses over large in this regard. The significant preference which both this budget and its predecessor have extended to small businesses appears to owe much more to a desire to bow before small business than to any unambiguous economic rationale.

Small businesses have accounted for only 18% of the increase in employment over the most recent five years for which data are available, while firms with more than 200 employees – which the ABS defines as “large” – have accounted for 52% of the increase in total employment over the past five years, despite accounting for less than 32% of total employment. And large businesses are more likely to engage in “innovative activities” than small ones, especially ones with four or fewer employees.

In other words, if the government wanted to cut company taxes in a way that was most likely to result in increased job creation or higher levels of innovation (assuming that cutting company taxes would have that effect), it should have cut company taxes for large companies ahead of small ones. But that would have been exceedingly difficult, politically, in the current climate.

Mixed messages

The other key element of the government’s ten year enterprise tax plan is the increase in the tax threshold for the second-top marginal rate from $80,000 to $87,000. The government says this will prevent “average full time wage earners … from moving into the second highest tax bracket”. But when you consider the difference between gross and taxable incomes, and that most people use deductions to reduce their taxable income, $87,000 is far from average.

The budget seems to be saying to people with taxable incomes of less than $80,000 – if you want to pay less tax, get yourself a negatively-geared property investment.

The budget is also arguably saying the same thing to people with taxable incomes of more than $250,000, people who have already contributed $500,000 to superannuation over the course of their lifetimes, or people who already have at least $1.6mn in their superannuation accounts. The message is if you put any more into superannuation, we are going to tax you more, but if you put it into a negatively-geared property investment, we won’t touch you, because (in the words of the Treasurer’s Budget Speech), “that would increase the tax burden on Australians just trying to invest and provide a future for their families”.

I am quite comfortable with the budget’s proposed changes to superannuation arrangements. But I can’t see why people – even wealthy people – who are “just trying to invest” through superannuation should be singled out for less generous tax treatment, while people who are doing exactly the same thing through negatively geared property (or other) investments should remain unscathed.

The Treasurer reportedly toyed with the idea of limiting “excesses and abuses” of negative gearing, with caps on claims. This would have more or less exactly paralleled what the budget seeks to do with regard to superannuation.

The decision not to go down that path was reportedly “a political – and not an economic – move”.

But it has, and will have, economic consequences.

Combined with the Reserve Bank’s latest cut in official interest rates, the budget’s decisions and non-decisions with regard to income tax cuts, superannuation and negative gearing are likely to encourage more Australians to borrow more money in order to invest in the property market. At a time when Australia has one of the developed world’s highest ratios of household debt to GDP or personal income, and amongst the developed world’s most expensive residential real estate.

Author: Saul Eslake, Vice-Chancellor’s Fellow, University of Tasmania

Three critical tests for Budget 2016: how does it fare?

From The Conservation.

There are three critical tests for this year’s budget. Is it serious about repairing Australia’s ongoing structural budget deficits? Does it make much of a difference to economic growth? And is it fair?

Budget repair

Over the last year, the bottom line got worse. The long-promised return to surplus receded another year over the horizon. This is the seventh time a budget has forecast a drift back to surplus over the following four years while the outcome for the current year showed minimal improvement over the year before.

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Also consistent with the history of the last seven years, most of the damage was done by “parameter variations” – changes in the economy that meant the budget didn’t live up to previous expectations.

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The government has made much of the need to repair the budget through spending reductions rather than tax increases. Overall, however, forecasts assume that most of budget repair will be the result of increasing revenues as a share of GDP. A large component is that nominal wages are expected to rise, leading to higher income tax collections, known by budget nerds as “fiscal drag”, and commonly referred to as “bracket creep”.

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There’s plenty of room for things to keep going wrong. The largest risk is that nominal wages may be lower than forecast.

Last week the Australian Bureau of Statistics reported much lower inflation than expected. On the day of the federal budget the Reserve Bank responded by cutting interest rates, implying a real risk that unusually low inflation will persist. If it does, then income tax collections will be hit, hurting the budget bottom line, particularly in the last year or two of the budget estimates.

This presents an interesting challenge for Treasury. If an election is called towards the end of this week, then it must release PEFO – the Pre-election Economic and Fiscal Outlook – by around May 20. With inflation lurching south, PEFO may significantly revise the budget bottom line, which will inevitably raise perceptions – probably unfairly – that the government is not firmly in control of economic management.

The other big risk is that export prices fall short of forecasts. The budget assumes an iron ore price of US$55 per tonne. This is close to recent prices, but they were US$40 a tonne just six months ago. If the price drops back US$10 to US$45 per tonne, budget balances are expected to be A$4 billion a year worse off.

Specific measures don’t do much collectively to improve the budget bottom line. As with each of the last seven years, there are substantial gross tax increases and spending reductions, but other decisions largely offset these. Overall, specific measures drag on the budget outcome by $5 billion for the coming year, but improve the last estimated year (2019-20) by $6 billion.

Jobs and growth

The key selling point for the budget is “jobs and growth”. However, there are questions about whether the budget initiatives will matter much to the economy within the next four years.

The largest single initiative is a cut to the corporate tax rate, particularly for small-to-medium businesses. The tax rate will be cut from 28.5% to 27.5%, and by 2019-20 this will apply to businesses with up to $10 million in turnover, up from the current limit of $2 million.

This will doubtless be popular with hundreds of thousands of small businesses. However, given Australia’s dividend imputation scheme, the tax change makes no difference to the amount of tax levied on profits paid out to Australian business owners. A lower tax rate only matters to the budget and the economy when businesses re-invest retained earnings.

However, the overall effect will be small. The tax changes are supposed to reduce tax collected in 2019-20 by A$2 billion – by definition, money retained in businesses and re-invested. This compares with total corporate investment in capital of about A$120 billion a year, and much more in paying for additional staff. The tax change is small beer in comparison.

There may be a larger tankard of beer in reducing tax rates for foreign corporates. But they will receive no benefit until after 2020-21 – well after the next two elections. And recent work has cast doubt on how much of the economic benefit will ultimately benefit Australians.

It is stretching things to believe that other measures will turbo-charge the economy. The budget contains relatively little new infrastructure spending.

Instead there are a lot of plans to do more planning. The most promising economic feature may be a new Youth Jobs PaTH package. This replaces work for the dole with a training, internship and subsidised employment pathway that is at least a little closer to what the literature recognises as best practice.

Fairness

Despite its jobs and growth packaging, the boldest moves in the budget were about fairness. Wide-ranging reforms to superannuation are a big move in the right direction. The current system is poorly targeted, with most of the tax concessions going to the top 20% of taxpayers who need the least help in saving for retirement.

Under the reforms, the top 4% will pay about A$2.6 billion more tax in 2019-20, offset by an additional A$1.8 billion tax concessions for the bottom 28%. These are material changes very different from the tinkering at the edges that has characterised superannuation reform over the last decade.

More controversially, the budget raises the 37% income tax threshold from $80,000 to $87,000. This gives the top 20% of income earners an extra $315 a year.

The fairness of concentrating tax relief on this group depends on the date of comparison. Genuinely middle-income earners (on $45,000 a year) have lost a greater percentage of their income in tax because of bracket creep since the Coalition took office. However, the change in percentage of income paid in tax is more or less the same for all income groups since 2011-12, because lower-income groups received more benefit from carbon tax compensation.

Conclusion

Budget 2016 was much like many of its predecessors over the last seven years. Budget repair was put off till later, and the net impact of budget decisions was small.

Although much was made of individual initiatives, these are unlikely to make much difference to economic growth in the next four years.

Although fairness, like beauty, is in the eye of the beholder, this budget will be easier to defend than some others in recent times.

Authors: John Daley, Chief Executive Officer, Grattan Institute; Danielle Wood, Fellow, Australian Perspectives, Grattan Institute

Australia’s soaring housing costs signal need for a new economic consensus

From The Conversation.

The deeper issue behind Australia’s current housing debates is how housing investment will impact on our long-term prosperity.

The International Monetary Fund estimates that Australia’s houses are overvalued by around 10%. The special place of housing arises from a distinctive policy consensus about how the overall economy should be managed and governed, which has dominated major party thinking since the early 1980s, and the institutional priorities this consensus has produced.

The questions we need to ask now are not so much whether house prices will slump, or whether they are too high. Instead, we should ask: what is investment’s role in the wider economy? And how can the underpinning consensus, which is outliving its usefulness, be renewed?

How we got here

This consensus was developed in the early 1980s, originally as a social-democratic project that embraced neoliberal economic reform. It was driven by the need to ensure all citizens benefited from the economy’s modernisation, and for a stable, consensual set of institutional arrangements through which to govern.

As Australia moved from the 1990s into the 2000s, low interest rates and the surge of mining-related income combined with growing private credit to drive house price inflation.

Mining was only one side of a twin boom in which private borrowing for housing purchases has helped drive prices to giddying and unsustainable levels. This is perhaps most obvious outside large cities. Every city in the Anglo world (the US, Canada, the UK, New Zealand, Australia) with a population of fewer than 100,000 people and house prices over five times the median income is in Australia.

Australia emerged from the once-in-a-century resources boom more indebted than when it entered. Bank lending increased between 1985 and 2015 from just above 20% of GDP to almost 130% of GDP. The data reveal that the private debt accumulated by Australians is largely for housing, and largely foreign.

Australia has the world’s highest ratio of housing debt to total lending at 54%. This compares to, for example, 16% in the US, 20% in France, 40% in the UK and 14% in Hong Kong. Australia also has the world’s second-highest ratio of mortgage debt to GDP at 99%.

This places Australia at risk in the event of a downturn in housing prices. But the deeper point is that housing is an unproductive economic investment. Housing is either direct consumption (owner-occupied) or speculative investment (rental returns are below interest rates, implying that buyers rely on future capital gains to make the investment pay).

Even more worrying, Australia’s productive base outside of mining has actually narrowed or declined over this period. Lopsided lending for private housing has diverted finance away from business investment, which should be devoted to the development of new products, services, infrastructure and jobs in non-mining sectors.

Housing finance increased from less than 25% of credit outstanding in 1990 to more than 60% today. Business lending declined from nearly 65% to less than 35% over same period. Finance for new houses declined from 35% of new commitments to 15% today.

This shift also illustrates the Australian economy’s changing structure. Finance and real estate soared from 7% in 1975 of gross value added to 12% in 2015. Mining grew only from 6% to 9%. Manufacturing declined from almost 20% to 7%.

Finance sector profits increased from less than 1% of GDP in 1985 to more than 5% in 2015. The finance sector now makes up almost half (47.5%) of the ASX200’s entire market value.

So, during this period, exports were concentrated into mining while rising wages and currencies hollowed out domestic industry. Private debt rose astronomically to fund house purchases. For two decades, mining investment, rising house prices and escalating government expenditure masked the impact. But as the mining boom subsides, the picture revealed is sobering.

Can we change course?

The current consensus assumes these structural shifts to be rational and inevitable because they are driven by market decision-making.

But as with the previous Australian consensus of the early 20th century, the assumptions and commitments standing behind the consensus are historically contingent. When the facts and circumstances change, the assumptions should be challenged.

Ballooning borrowing to invest in the housing market is impeding investment in the real economy, holding back the development of skills and jobs and driving up inequality. All of these damage Australia’s long-term economic growth.

Australia is not immune to the global forces that have increased returns to capital relative to returns to labour. This shift has left millions of workers facing a decline in real living standards and highlighted their over-dependence on sharemarket and housing price increases for income growth. Yet the 1980s consensus has almost nothing to say about how to respond.

One-and-a-half million Australian households now own more than one residential property. Two-thirds of those under 30 rent their home.

Wealth inequality is as high as it has ever been in Australia. The wealthiest one-fifth of households hold nearly two-thirds of Australia’s net wealth.

Long-run economic development and growth is supported by institutions that distribute opportunity and reward as widely as possible. This makes hard work, creativity and risk-taking worthwhile.

To achieve this in the 21st century, we must renew the consensus through an open, contested debate about Australia’s real and potential sources of comparative advantage and a sustained, long-term effort to invest in those advantages through public policy and private enterprise.

Time for a new consensus: fostering Australia’s comparative advantages, by Jonathan West and Tom Bentley, is published by Griffith Review and available as a free download.

Authors: Tom Bentley, Principal Adviser to the Vice Chancellor, RMIT University; Jonathan West, Emertius Professor, University of Tasmania

Government pitches for ‘integrity’ in tax and super: experts respond

From The Conversation.

In its 2016-17 budget the federal government has released a raft of new measures that it says will help modernise and build integrity into Australia’s tax and superannuation systems.

Small business will be the biggest beneficiary of the measures, while high-income earners building their super for wealth creation will be targeted to help the government raise A$2.9 billion.

From July 1 this year, businesses with turnover of less than $10 million per annum will pay a reduced tax rate of 27.5%. The same rate will only kick in for large companies (with turnover of $1 billion or more) in 2023. The tax rate for businesses both big and small will only hit the headline 25% rate in 2026.

The instant asset write off for small businesses will be extended to businesses with turnover of up to $10 million per annum, and the government will undergo a trial of simpler business activity statements.

The government claims these tax measures will contribute to a 1% increase in GDP, according to Treasury modelling.

There’s little in the way of tax cuts for individuals however, apart from a move on bracket creep that will increasing the upper limit for the middle income tax bracket that pays 37 cents in the dollar from $80,000 to $87,000 per year.

As expected, the government will increase the tax paid on super contributions by those on incomes of $250,000 or more from 15% to 30%. A range of other caps and reductions in concessions aimed at high-income earners will deliver the government revenue to extend the low income super tax offset. This will allow those on incomes of $37,000 or less to receive a refund of tax paid on concessional contributions up to $500.

And in a bid to help women who have career breaks, the government will introduce “catch-up super contributions” that will allow unused concessional contributions to be carried forward for up to 5 years for those with super balances of $500,000 or less.

A new “Diverted Profits Tax” will hit companies found shifting profits offshore with a tax rate of 40%. This is expected to raise $200 million by 2019. The government will also increase penalties for large companies that lodge their tax returns late, and fund a “tax avoidance taskforce” that’s expected to help the government raise $3.7 billion over the next four years. It will also strengthen protection for whistleblowers who report tax avoidance.

There will be four annual 12.5% increases in tobacco excise from 2017, which will help the government raise $4.7 billion. This measure will be backed up with a $7.7 million “strike team” to crack down on illegal tobacco activity.

Our experts respond below.

What changes will be made to superannuation tax?

Helen Hodgson, Associate Professor, Curtin Law School and Curtin Business School

The superannuation package will deliver a significant redistribution through scaling back the tax concessions available to people with high superannuation balances and/or the capacity to make substantial contributions to superannuation. The measures, with the exception of the lifetime cap, will commence from 1 July 2017.

The good news is the restoration of a tax offset for low income earners with income of less than $37,000 pa. The new Low Income Superannuation Tax Offset (LISTO) is very similar to the LISC: although the method of calculation is different, it will reduce any tax paid by the fund by up to $500 as long as a concessional contribution has been made during the year.

As expected, the concessional contributions cap has been reduced, although the new contribution is cap of $25,000 is at the higher end of the predictions. This is effectively reduces the current cap by $5,000 pa for people under 50, and $10,000 for people over 50. This cap can also be rolled over to assist people who have interruptions to their workforce participation, as long as their superannuation account balance is less than $500,000.

An associated measure will allow additional tax deductions for people who may not have been able to access the cap. This could arise where an employer will not allow salary sacrificing, or where a person has some income from paid employment but the balance of their income is from self employment. In such cases a person could not claim a tax deduction on topping up their superannuation so that additional contributions were treated as non-concessional contributions. This measure will allow consistent treatment across contributions.

The work test is being withdrawn so that people aged over 65 will no longer have to show that they are gainfully employed, which will allow either concessional or non-concessional contributions to be made up to the age of 75.

The non-concessional cap is being completely restructured. Under the rules that were in place prior to budget night a person could contribute up to $180,000 a year, or $540,000 every three years under the bring-forward rule.

With effect from Tuesday 3 May, the cap has been converted to a lifetime cap of $500,000. This will include all non-concessional contributions made since 1 July 2007, although if the cap has already been reached there will be no penalty imposed. However in future if a person breaches this cap it will be required to be withdrawn or subject to penalty tax.

Other measures to reduce the tax benefits to high income earners are the lowering of the income threshold where contributions are subjected to the higher 30% tax rate to $250,000. However there is a new proposal to limit the tax exemption of superannuation in retirement phase when the member has a balance of more than $1.6m in assets. If a member balance is more than $1.6m, the surplus needs to be left in accumulation phase where it is subject to 15% tax, or penalties will apply. Assets that are used to support transition to retirement income streams are also to be taxed at 15% in the superannuation fund.

In addition to the rollover of concessional contributions, a spouse can receive a tax offset of up to $540 for contributions made on behalf of a spouse who earns less than $37,000 – increased from $10,800. The low income threshold resulted in the existing concession being underutilised. However there is no superannuation guarantee requirement on paid parental leave.

Overall, the package is progressive. The government has estimated that the net increase to the revenue is $2.9bn after redistributing over $3bn to low income earners and in removing some anomalies.

There is evidence that high income earners will continue to save in other environments. The test will be how much of the savings is switched to productive income, and how much goes to other tax shelters, such as the property market.

How will tax excises change and what will this mean for the cost of alcohol and cigarettes?

Megan Vine, Law Lecturer, UNE

The proposed a 12.5% annual increase in tobacco excise over the next four years to 2020, will act as a continuation of the same increase over the previous four years introduced by the Labor government. If previous estimates are correct this means a 25-cigarette pack will cost approximately $40 by 2020. In addition to increases in tobacco tax the government will be decreasing the duty free tobacco allowance in Australia from 50 cigarettes to 25 cigarettes or equivalent.

There will be no changes to excise tax rates for alcohol or fuel and no changes to the way in which wine is taxed. This means inconsistencies in the current tax arrangements for alcohol, where rates of taxation vary considerably for different types of alcoholic beverages will not be addressed by the current budget.

However, as part of its Ten Year Enterprise Tax Plan, the current brewery refund scheme, which provides a refund to independent breweries of 60% of the excise duty paid up to a maximum of $30,000 per financial year, will be extended to domestic distilleries and producers of low strength fermented beverages such as non-traditional cider from 1 July 2017.

Further in response to integrity concerns the government will be reducing the wine equalisation tax (WET) rebate cap from $500,000 to $350,000 on 1 July 2017 and to $290,000 on 1 July 2018 and will be tightening eligibility criteria from 1 July 2019. Hopefully these changes will have some impact on the distorting effects of the rebate discussed in the Senate Committee report into the grape and wine industry. The Government will also be providing $50 million over four years to the Australian Grape and Wine Authority to promote wine tourism within Australia and Australian wine overseas to benefit regional wine producing communities. While changes to eligibility will likely be welcomed by the wine industry the reduction in the cap may impact smaller producers.

Will there be a new Australian Google tax to crack down on tax avoidance?

Antony Ting, Associate Professor, University of Sydney

The government has introduced the Multinational Anti-Avoidance Law (MAAL), commonly known as the Google Tax, effective from 1 January this year. The MAAL is designed to deal with tax avoidance structures of multinational enterprises such as Google and Microsoft.

Early signs suggest that the MAAL has both positive and negative impact on the behaviour of MNEs. On the positive side, many multinationals have proactively initiated discussion with the Australian Taxation Office with the intention to ascertain whether they will be subject to the MAAL, and if so, to explore how they should restructure to comply with the law. An obvious positive result of the MAAL is that Google recently announced that it will restructure its operations and commence to pay more tax in Australia in 2016

On the negative side, the ATO has recently released a tax alert to warn multinationals that it is aware that some have entered into “artificial and contrived arrangements to avoid the application of the MAAL”.

The silver lining of this development is that it suggests that the ATO appears to be on top of the issue and the release of the tax alert is likely to have some deterrent effect to curb the zest for aggressive tax planning by multinationals with respect to the MAAL.

To further strengthen the tax law on this front, the Treasurer announced in the Budget that the government will introduce an even stronger anti-avoidance law, a new Diverted Profits Tax (DPT). The new tax will be effect from 1 July 2017. Its design follows largely the DPT introduced in the UK last year.

The new DPT will have a wider scope than the MAAL. It will apply to large multinationals (with a global revenue of at least $1 billion) if among other things, a multinational has artificially shifted profits from Australia and the foreign tax paid on that profits is less than 80% of the Australian tax otherwise payable.

In other words, if the profits are shifted to a jurisdiction with a corporate tax rate of less than 24%, the DPT may apply. This threshold will cover most of the low tax countries commonly used by multinationals in their tax avoidance structures.

If properly designed, the new DPT is likely to have strong deterrent effect. This is because its tax rate is 40%, which is 10% higher than the standard corporate tax rate in Australia. The experience in the UK with its version of the DPT suggests that this penalty rate will be an important factor for MNEs to consider before entering into aggressive tax avoidance structures.

The new DPT is a welcome move by the government to combat tax avoidance by multinationals.

Do the tax changes represent real reform?

John Freebairn, Professor, Department of Economics, University of Melbourne

The Treasurer has proposed tax reforms which in aggregate are approximately aggregate revenue neutral. The question then is will the reforms reduce distortions to productive decisions to work, invest and spend, and what are the implications for distribution of the tax burden?

The decision to extend special tax concessions to small businesses (a lower rate of 27.5%, immediate write-off for investments less than $20,000, and extend the small business definition from turnover of $2 million to $10 million) while maintaining the current higher taxation of larger businesses might be politically popular, but it involves a revenue loss for no productivity gains. While the Treasurer indicated funds to pay for the current changes, mostly from greater integrity of the taxation of multinational companies. However, no indications were given for funding to extend the 27.5% rate to all businesses by 2023-24.

There is no compelling evidence that small businesses are more or less important or successful than large businesses in creating jobs, developing and implementing new products and production processes. There are many examples of successes and failures across both small and large businesses. The revised $10 million cut-off for the concessions is just as arbitrary as the preceding $2 million number. A more nationally productive reform would have identical and lower tax rates on comprehensive business income tax bases independent of size.

Budget proposal to reduce some of the tax concessions for superannuation for high income earners and use the revenue saved to raise the personal income tax bracket from an annual income of $80,000 to $87,000 for those on upper middle and above incomes represents a very tentative move towards a more equitable and less distorting system of personal income taxation. Of course, part of the change is no more than a return of bracket creep and the associated increase of average tax rates for all.

Those who are making large superannuation contributions will lose more from the reduced concessions than the gain from the lower tax rates. For many with average decisions the gain and loss will roughly cancel. A broad and comprehensive labour income tax base would tax all forms of remuneration, including super and fringe benefits, the same as wages and salary income. The broader base and lower rate approximately revenue neutral package would reduce distortions to decisions to work and encourage participation.

The Treasurer in defending no changes to the lower income tax brackets fell back on the argument that these people received income tax cuts as compensation for the carbon tax introduced in July 2012. Bracket creep is causing larger increases in average tax rates for the two-thirds of taxpayers with incomes below average weekly earnings. When the carbon tax was removed in July 2014, the income tax cuts were retained. This seems a tough equity argument to sell.

Authors: Helen Hodgson, Associate Professor, Curtin Law School and Curtin Business School, Curtin University;
Antony Ting, Associate Professor, University of Sydney; John Freebairn, Professor, Department of Economics , University of Melbourne; Megan Vine, Law Lecturer, University of New England

The way Australia taxes housing is manifestly unfair

From The Conversation.

When politicians talk about tax and fairness, it’s easy for them to point out undeserved loopholes benefiting the wealthy, or multinational companies. But the elephant in the room is the difference between those who own and those who rent (or have recently bought and have huge mortgages) the house they live in.

The tax advantages of housing offend against justice on every count: they place financial stresses on the poor, they are unequal, and the increase in price is not deserved.

Owner-occupied houses are exempt from income and capital gains tax, and from social welfare means tests. Negative gearing gives investment properties a tax advantage, which is exacerbated by discounts on rates of capital gains tax. Rent assistance given to those on social security (currently a maximum of A$130 per week) is not sufficient to compensate for the difference.

The high price of housing is created by tax inequalities and by supply and demand imbalances created by government failure. At the same time, the government has encouraged banks to borrow hundreds of billions offshore to fund greater mortgage debt – pushing prices higher. Foreign depositors are faced with a low 10% withholding tax (reduced from 15%), and have not been subject to adequate money laundering controls.

And there is not much social benefit in higher house prices to counteract the costs to non-homeowners. Higher prices have not led to a significant increase in supply over time; people do not spend the increase, nor use it much to fund their retirement.

Defining ‘justice’

The word justice is used so widely, it needs some definition. While “fairness” is applied more widely, justice can be used to incorporate four sometimes conflicting objectives. Justice seeks, as much as possible to:

  • Contribute to economic equality
  • Give each person their just deserts
  • Meet people’s essential needs
  • Allow for personal liberty by not interfering in people’s lives.

Such a model of justice can be used to evaluate tax systems.

For those concerned that justice comes at a cost to efficiency and economic growth – there is considerable evidence to show that the relationship, where it exists, is positive. Giving people their just deserts provides the material incentives so beloved of economists. Evidence from a broad group of countries shows little overall relationship between income inequality and rates of growth and investment. Fairer taxes lead to greater compliance with tax laws. Research has found a significant increase in Australian tax morale between 1981 and 1995, which was explained by reforms that people saw as making the system more just.

Clouded by politics

Amid the ongoing debate about tax reform during the last year, many had hoped for some meaningful changes in the coming federal budget.

Instead, the current debate on the tax system, and more recently negative gearing, is concerned with perceptions of political acceptability.

This was also typified by the dismissal of any change to the taxation of housing in the Re:think tax discussion paper:

“Given the central importance of the home for Australian families, there is a strong consensus that it would not be appropriate to tax either the imputed rent on owner-occupied housing or capital gains derived from it.”

“Strong consensus”, whatever that means, is not a good reason if it involves injustice. The argument works the other way: given the central importance of the home, and its place in income and assets, it is essential for housing to be included in our tax and welfare systems. Let’s be the land of the fair go, even if we have to give up some personal advantages.

Reform options

Addressing the issue is complicated politically in that around 70% of voters own their houses, and a significant minority have borrowed heavily to get into the market in recent times. If prices drop, they will suffer through no fault of their own, as would the banking industry. With more than two million shareholders, banks are also strong politically.

The Henry tax review did, however, recommend a transition from stamp duties to a land tax, a significant increase in rental assistance and the removal (albeit with a high threshold) of the exemption of owner occupied homes from the means test for pensions.

The greater efficiency, and justice, of land taxes means that they have fairly widespread support from informed commentators. Taxes on property currently raise A$29 billion annually for the states and another A$14 billion for local governments in Australia. If land accounts for 50% of the value of residential housing, the additional revenue would be of the order of A$75 billion. Another A$40 billion might be possible if commercial land was also be included.

Removing capital gains discounts and taxing imputed rents should also be considered. Research released in 1994 found the latter would be both efficient and more equitable in Australia. The advantage of this is that such a system allows for the tax deductibility of mortgage repayments, so would provide compensation for the minority that had recently bought into the housing market. A higher withholding tax on international deposits would also reduce the availability of funds to push up assets, and encourage local businesses by removing some of the artificial support for the currency.

Housing accounts for more than 60% of the value of total assets held by Australians. Translated into imputed rent it amounts to about A$150 billion annually, or 20% of the gross personal income of those who own their homes. If taxed at marginal rates of tax, imputed rents would add about a third to current personal tax of A$190 billion annually.

This article is a summary of a paper “The justice of 2016 Australian tax and redistribution” to appear in the St Mark’s Review.

Author: Anthony Asher, Associate Professor, UNSW Australia

Stronger role for ombudsman is the key to protecting bank customers

From The Conversation.

The federal government responded to calls for a banking royal commission with a raft of changes to the Australian Securities and Investment Commission (ASIC) but for consumers, who bore the brunt of the recent financial scandals, it is further potential changes to the Financial Ombudsman Service (FOS) that may matter the most.

The media has focused on recommendation for change at ASIC, where the majority of recommendations announced yesterday were outcomes of the ASIC Capability Review. The review was itself was recommended by the 2015 Financial System Inquiry, which commenced began back in 2014.

It is good to see movement on these recommendations, though some of the fine points such as the user-pays funding model and ASIC’s new recommended internal governance structure may remain subject to debate.

Equally if not more important for consumers is the government’s new review – also announced yesterday – of the Financial Ombudsman Service (FOS) and other external dispute resolution schemes. This is where average Australians takes up cases of carelessness, wrongdoing, negligence and fraud every day. According to reports, the FOS alone received 30,000 complaints last year. It is the coal face.

The FOS, itself operating under ASIC’s regulatory guidance, is the natural place for consumers to find their voice. It is an independent body for dispute resolution, keeping cases away from the courts with the aim of enabling consumers to win remedial action at lower cost and in less time. There are reported issues around about the response time of staff at the FOS, and the overall resources available to support work volumes and complexity, but the need for a strong FOS appears to be undisputed.

Submissions to the original Financial System Inquiry in early 2014 attest to the role of the FOS, and hint at its potential effectiveness. In one submission, the Consumer Credit Legal Centre in NSW provides case study after case study of consumers who went to the FOS seeking help for unpaid insurance claims, fraudulent mortgages and irresponsible lending practices.

In an ideal world, these circumstances would not arise – but no system is perfect, or immune from abuses. The submission of consumer group Choice to the inquiry also recognised the role of external dispute resolution schemes for both consumers and the benefit of the overall system.

In light of ongoing issues and scandals in the financial sector, it might be reasonable to consider further beefing up the resources and powers of the FOS. Policing a system through high level surveillance is one way to detect problems; gathering intelligence from the grassroots is another.

But the system is messy. In addition to the FOS, the external dispute resolution landscape includes the Credit and Investment Ombudsman and the Superannuation Complaints Tribunal, each with their own guidelines of where and how they can get involved in a case. This is a confusing menu of options for the consumer, even after the 2008 consolidation that brought the number of schemes down from eight to three.

The role, powers and governance of these bodies will now be the subject of another independent review, with an expert panel to be convened and asked to report back by the end of this year. Among other items, this review might consider removing these bodies from ASIC.

Such a separation would leave ASIC free to concentrate on its core role: ensuring market integrity through surveillance and enforcement. It would relieve ASIC of the responsibility for consumer protection in financial services – the only industry where ASIC instead of the ACCC has a mandated role in relation to consumer protection.

A suggestion to relocate responsibility for consumer protection in financial services from ASIC to ACCC was one of the suggestions made by Alex Erskine, in a paper submitted to the Financial Services Inquiry and published by the Australian Centre for Financial Studies in 2014. In the paper, Erskine argues that ASIC suffers from being charged with six policy objectives and insufficient tools – thus failing the Tinbergen Principle that holds that every single policy objective needs to have at least one policy tool if it is to be realised.

This analysis merits careful consideration. In every other industrial sector in Australia, the ACCC is charged not only with consumer protection, but also competition.

The importance of competition in promoting efficiency and encouraging satisfactory consumer outcomes was a theme that carried through the findings and recommendations of the Financial Services Inquiry, and remains a subject of great public debate in relation to the financial services sector.

ACCC holds sufficient power to investigate any matter of unconscionable conduct, whether within a single firm or on an industry-wide level. It is also the competition regulator. These activities sit within its core mandate and institutional expertise. What is the role of this regulator in Australia’s financial system?

The opus magnum of the Financial System Inquiry continues to be written, as the industry now awaits the outcome of another highly significant review.

Author: Amy Auster, Executive Director, Australian Centre for Financial Studies

Could gambling be the secret to saving when rates are so low?

From The Conversation.

Many interest rates in the U.S. are close to zero and even negative in some parts of the world, like Japan.

Not unexpectedly, U.S. savings rates are also quite low as individuals ask themselves: “Why save a lot of money at a bank if I get no return?”

This situation has many commentators wringing their hands because low savings rates are a problem for many reasons.

Individuals who don’t save face spending their golden years of retirement in poverty, instead of plenty. In addition, people with no savings face financial problems and potential ruin when unexpected large expenses occur and cannot help out their children with large bills like college or a down payment on a first home.

In the absence of a rapid increase in interest rates, which appears unlikely, is there anything we can do to change this problem and get people to save more?

As odd as it may sound, gambling could be part of the answer.

A simple solution: prize-linked accounts

One innovative idea for boosting low savings rates is through prize-linked savings accounts, also known as lottery-linked deposits.

The idea of prize-linked accounts is simple. Instead of receiving the full amount of interest on their savings, most people are given less money than they would otherwise and the remainder is distributed as prizes awarded randomly to some savers chosen by a lottery.

Pretend the average person receives US$2 each month in interest on a standard savings account. A bank offering a prize-linked account might instead give the account holder $1 of interest plus a small chance – slightly better than scratch tickets – to win $10,000. The bank would gather the $10,000 prize money by pooling the extra dollars of interest held back from many savings accounts.

These lottery savings accounts are an innovative idea because interest rates today are very low and offer little or no incentive for people to save money. Low savings rates cause people to abandon traditional savings accounts and lead some people to seek higher rates of return in very risky investments.

Prize-linked accounts have the advantage of ensuring savers never lose their initial funds, unlike other forms of gambling where losers can go home empty-handed.

One example of how prize-linked accounts work is the save-to-win program, promoted by a nonprofit with a mission to boost financial security among the poor. Savers deposit their money in a special 12-month account. Every $25 deposited gets the saver one more lottery ticket. Each month some prizes are awarded, and in some locations there is also an annual grand prize of $10,000 for those people who kept money in the bank for all 12 months.

These rules encourage people to open accounts, leave money untouched and build savings. Evaluations of these accounts since they began in 2009 suggest they are effective at boosting savings especially among the poor.

History of prize-linked accounts

Prize-linked savings accounts are not a new invention. The first lottery savings account was created in England in 1693 to help fund the Nine Years’ War against France.

It was a great success and raised a million British pounds for the government, which was about one-sixth of all public spending that year. Savers bought tickets for £10 each. Each ticket had a chance to win a grand prize of £1,000 per year for 16 years.

Tickets that won nothing in the lottery, however, paid interest of £1 per year for 16 years, providing the English Crown with a medium-term loan whose proceeds were used to fight a war. This was a huge success for savers because each £10 ticket returned a total of £16, plus a chance of winning a jackpot.

Controversy

Controversy has surrounded prize-linked accounts ever since their introduction in 1693. Initially, criticism was leveled against the accounts because they encouraged people to gamble, which many people viewed as immoral.

More recently, governments have been against the accounts because they divert funds from state-sanctioned lotteries. South Africa’s First National Bank created a very successful account in which winners received a maximum payout of about $150,000. This program boosted savings by the poor and unbanked in South Africa. However, that country’s Supreme Court ruled the accounts were illegal after the state lottery commission complained that its own sales were reduced as a result.

While many other countries have created prize-linked savings accounts, the idea is relatively new in the U.S. The first prize-linked savings accounts were created in Michigan in 2009.

The successful introduction of these accounts in other states like Nebraska resulted in President Barack Obama signing into law in December 2014 the “American Savings Promotion Act,” which enabled credit unions and banks to offer these accounts across the country. President Obama and Congress needed to revise the laws, because prior to the bill it was illegal for banks to engage in risky activities such as sponsoring a lottery.

States, however, also have to change their laws for this program to become widespread. One of the most recent states is Oregon, which passed legislation in June 2015 enabling banks to offer the accounts this year.

Very interesting but preliminary research is being done by University of Colorado Finance Professor Tony Cookson, who examined people in Nebraska and found that the introduction of lottery-linked savings leads consumers to reduce casino gambling. This means that these lottery-style accounts can not only boost savings rates but also encourage people to gamble less in casinos. While this is a win for consumers, it is problematic for states that are dependent on casino and lottery revenue to balance their books.

A ‘special’ boost

Prize-linked savings accounts are not the complete solution to low savings problems in the U.S. and elsewhere. Nevertheless, these accounts can help.

Encouraging people to save and build an emergency cushion for a rainy day is important. Prize-linked savings accounts are one way to do this.

My bank recently sent me a mailing trumpeting the fact that because I am a long-term “valued” customer, my savings account got a special interest rate boost to encourage me to save more. Even with the “special” boost, I earned a grand total of $1.27 in interest for the month. This tiny sum gives me no incentive to spend less and save more.

However, a prize-linked savings account that did away with all of my paltry interest but gave me a small chance at earning enough money to actually buy something of value would definitely encourage me, and likely many others, to save more.

Author: Jay L. Zagorsky, Economist and Research Scientist, The Ohio State University

Morrison warns banks not to pass on new ‘user-pays’ impost to finance ASIC reform

From The Conversation.

Treasurer Scott Morrison has warned Australian banks not to pass on to customers the $121 million user-pays charge imposed on them to finance a strengthened Australian Securities and Investments Commission (ASIC).

The banks will pay for almost all the $127 million four-year package, which the government hopes will take the sting out of Labor’s promise that it would set up a royal commission.

But Opposition Leader Bill Shorten said the issues were not just matters of the law but the culture.

The government will provide $61.1 million to boost ASIC’s technology to boost its surveillance capabilities. “In the 21st century economy, you need a tech cop on the beat,” Morrison said.

Another $9.2 million will go to ASIC and Treasury to ensure they can implement appropriate law and regulatory reform.

ASIC will get a further $57 million for the ongoing cost of increased surveillance and enforcement in the areas of financial advice, responsible lending, life insurance and breach reporting.

The measures follow a capability review of ASIC initiated by the government in July.

Among other changes, an extra ASIC commissioner will be appointed with experience in the prosecution of crimes in the financial services industry.

The government is accelerating the implementation of recommendations from the Murray review of the financial system for increased penalties and greater powers for ASIC to intervene on financial products.

ASIC’s employment practices will be exempted from the public service act, so it can recruit from the market people with experience in the sector.

The government will recommend that the financial services ombudsman changes its thresholds to provide greater access for treatment of claims and compliance.

An “eminent panel” will examine bringing together forums to have a “one stop shop” for consumer complaints.

Morrison told a joint news conference with Assistant Treasurer Kelly O’Dwyer that the banks would pay an additional $121 million to increase the resources of ASIC.

ASIC would also be moved to a full user-pays funding model. “No longer will it be the case that taxpayers will be hit to fund this regulator, this enforcement authority, this cop on the beat. Those whom it’s enforcing the regulations and rules on, will pay the price for that,” he said.

Asked whether the banks would not just pass on the impost in higher fees and charges, Morrison said the levies were “easily digestible by the banks”. He would be “furious” if the banks sought to pass the cost on and they had that message from him.

The term of ASIC chairman Greg Medcraft, which is expiring, has been extended – but only for 18 months to oversee the implementation of the reforms.

Making his pitch for reforming ASIC rather than having a royal commission, Morrison said: “What I have outlined today is a serious action plan. … This is what practical, effective targeted government looks like and that’s how we are responding to these issues of real concerns to Australians.”

He said Shorten “wants to spend your money to fund his political exercise which won’t get outcomes for people – it will just get a political outcome for Bill Shorten”.

O’Dwyer denied that the government previously tried to wind back consumer protections in the financial sector. “That’s simply not correct,” she said.

The Abbott government introduced regulations to water down the Labor government’s Future of Financial Advice (FOFA) reforms. But later these were disallowed by the Senate.

Shadow treasurer Chris Bowen said the package was “nothing more a political fix” to try to avoid a royal commission. “It’s a plan to hobble through an election.”

Responding to the government’s announcement Westpac said “The measures announced today by the government will play an important role in ensuring customers can be confident in our banking system.

“In line with our submission to the financial system inquiry, Westpac supports a user pays model for ASIC.”

Australian Bankers’ Association chief executive Steven Münchenberg said: “We support the introduction of a new industry funding model for ASIC” adding that it was “important that contributions are transparent and that the amount of fees levied matches the level of regulation and resources required for ASIC”.

He said that the banking industry supported, in principle, the product intervention power for ASIC to bolster consumer protections. “However, we need to be wary of any action that may have unintended consequences and adversely impact on product innovation or consumer choice.”

Author: Michelle Grattan, Professorial Fellow, University of Canberra

FactCheck: does ASIC already have the powers of a royal commission and more?

From The Conversation.

ASIC has the powers of a royal commission and, in fact, it has greater powers than a royal commission. – Treasurer Scott Morrison, speaking to reporters, April 8, 2016.

Opposition Leader Bill Shorten has promised to set up a royal commission into misconduct in the banking and financial services industry if elected.

Treasurer Scott Morrison has said that Australia’s banking system is already well regulated and that the Australian Securities and Investments Commission (ASIC) has all the powers of a royal commission and more.

Shadow Treasurer Chris Bowen said that a royal commission has a far broader reach than ASIC.

Who is right?

The answer is: it’s complicated. It depends on what it is you hope to achieve.

What the government said

The government and the opposition have been trading media releases on this issue.

A press release issued by Morrison outlined the relative powers of a royal commission, and ASIC. It is reproduced below:

Media release from Treasurer Scott Morrison. Media release from the federal treasurer Scott Morrison.

In addition to the above, ASIC can impose penalties, liability to pay compensation and management banning orders.

It is true ASIC does have very broad powers, but investigations typically centre around a specific suspected breach of the law.

If the aim is to investigate the banking industry as a whole – issues like ethics, culture and whether regulators have done a good job – then a royal commission would have broader scope to do this.

However, unlike ASIC, a royal commission cannot initiate civil, civil penalty or criminal proceedings. It must instead refer instances of suspected wrongdoing to relevant regulatory bodies, such as ASIC and the Director of Public Prosecutions.

What the opposition said

Shadow Treasurer Chris Bowen has said a royal commission could go further than ASIC. In a press release, he said:

A royal commission has the power to hold public and private hearings, to use search warrants, to compel the production of documents and to call witnesses from a wider pool than an individual investigation of the kind ASIC normally runs.

Critically, the royal commission will be set up to examine the entire system, including the broader context and causes of individual cases of misconduct and how these systemic issues can be addressed.

The royal commission will also examine whether Australia’s regulators are equipped to identify and prevent illegal and unethical behaviour, especially important in the context of the Liberals’ A$120 million cuts to ASIC. Clearly, ASIC cannot examine their own capacity in the way a royal commission can.

What Bowen is describing here is a much wider look at banking than ASIC would normally take.

A royal commission’s terms of reference are set by the government and can be as broad or as narrow as the government wishes. A royal commission might investigate how a particular catastrophic event occurred – such as the collapse of HIH. A royal commission might also be set up to investigate broader, systemic problems such as institutional child abuse.

The Royal Commissions Act gives royal commissions strong coercive powers, including the power to summon witnesses to give evidence under oath, compel the production of documents and apply for a search warrant.

What can ASIC do?

ASIC’s main role is to monitor compliance with a range of corporate and financial laws. There are two ways ASIC might look into the performance of banks.

First, ASIC can conduct an investigation either on its own initiative or following a direction from the minister. An investigation can only relate to certain matters specified in the ASIC Act – mainly isolated instances of suspected illegal activity or a need to monitor compliance with the law. An investigation must be conducted in private.

Alternatively, ASIC can conduct a hearing, which can be either public or private depending on the circumstances. The hearing has to be “for the purposes of the performance or exercise of any of ASIC’s functions or powers”.

Again, it’s not a blank cheque to review the performance of an industry, and in practice seems to be used for individual cases such as licensing matters, or disqualifying directors. The minister is not able to direct ASIC to conduct a hearing.

For both an investigation and a hearing, ASIC can require witnesses to attend and give evidence on oath, compel the production of documents and apply for a search warrant.

What can APRA do?

Another player in the game is the Australian Prudential Regulation Authority (APRA), which regulates financial service providers like banks, superannuation funds and insurance companies.

Unlike ASIC, its activities focus on supervision of financial service providers and encouragement of good practice, rather than enforcement of rules.

However, like ASIC, it has extensive powers to require people, banks and other corporations to provide documents and information. While most of APRA’s activities focus on actual or potential failings of specific institutions, it also has a role in conducting broader assessments of the state of financial industries.

So who’s right?

A lot of this is bickering about technical details. Both a royal commission and ASIC can require a person to give evidence, on pain of imprisonment – that’s a strong coercive power.

And it is true ASIC can prosecute and a royal commission can’t – but a royal commission can refer suspected offences to the Director of Public Prosecutions, who can prosecute them.

Morrison is correct that the Australian banking industry is regulated by bodies with significant investigative powers, including some powers that a royal commission would not have – such as the power to initiate civil and criminal proceedings on its own.

But Bowen is also correct that a royal commission could have the ability to conduct a broader inquiry than APRA and ASIC. Those bodies generally deal with individual cases rather than systemic problems.

If Labor’s position is that the regulatory system itself (as opposed to the actions of individual banks) is at fault, there are obvious limitations in giving the existing regulatory bodies the task of overhauling the system. It is a bit like asking someone to check their own homework. There has already been a significant recent Senate inquiry into ASIC’s performance, but few of its recommendations have been implemented.

In other words, the parties are talking at cross purposes.

Verdict

Both Morrison and Bowen’s specific claims about the respective powers of ASIC, APRA and a royal commission are correct. However, the central question is: power to do what?

If the aim is to investigate and prosecute specific instances of suspected breaches, ASIC is well equipped to do this on its own in a way that a royal commission could not.

If the aim is to examine the industry and system as a whole, a royal commission would have broader scope to do this. – Anna Olijnyk

Review

This is a sound article that seeks to present a balanced view of both sides of the argument.

I would add one important point. While it is true a royal commission can refer suspected offences to the Director of Public Prosecutions who can prosecute, the evidence is that criminal prosecutions rarely result from the recommendations made by royal commissions or parliamentary inquiries.

Take, for example, the Cole Inquiry, which was set up in 2006 to investigate more than $US 200 million paid in kickbacks to Iraq in contravention of the UN Oil-for-Food Program by the now defunct government-owned corporation, the Australian Wheat Board (AWB).

That particular royal commission found that there were circumstances which could give rise to criminal proceedings against AWB and various people – but no criminal action was ever pursued.

ASIC only instituted civil penalty proceedings against six former directors and officers of AWB relating to directors’ duties.

Similarly, a Special Commission of Inquiry relating to the James Hardie asbestos scandal recommended that criminal proceedings be brought against certain people. However, ASIC and the Director of Public Prosecutions did not take any criminal action and launched only civil penalty proceedings. – Vicky Comino

Author: Anna Olijnyk, Lecturer, Adelaide Law School, University of Adelaide
Reviewer: Vicky Comino, Lecturer in Corporations Law and Regulation of Corporate Misconduct, The University of Queensland

 

Controversial history of Road Safety Tribunal shows minimum pay was doomed from the start

From The Conversation.

The federal government is rushing to abolish the Road Safety Remuneration Tribunal (RSRT) after the tribunal issued a controversial pay order establishing a national minimum pay rate and unpaid leave for truck drivers. This latest move is not surprising as the tribunal has had a short history plagued by controversy.

The government has indicated that, in legislating to abolish the RSRT, it will shift some of its functions to the National Heavy Vehicle Regulator (NHVR). The NHVR’s role is usually holding various stakeholders, like trucking companies and owner-operator truckers, accountable for implementing safe work practices, but its jurisdiction doesn’t extend to pay orders.

Given that abolition of the RSRT is foreshadowed because of its role in setting pay rates for contractor drivers, it is very unlikely the government will seek to add this function to the NHVR.

The history and purpose of the RSRT is rooted in addressing the problem of a uniform pay for truckers. When it was established in 2012, it was tasked with promoting safety in the road transport industry, primarily through pay.

It was created after the National Transport Commission found in 2008 that there was a link between driver remuneration and safety outcomes for truck drivers. The commission recommended a national scheme to set minimum safe rates for employee and owner drivers.

The tribunal is independent from the Fair Work Commission and regulates both employee drivers and contractor drivers, their employers and hirers and participants in the supply chain, such as supermarkets.

At first the RSRT spent time examining a broad range of stakeholder submissions from all parts of the road transport sector and engaged in widespread and lengthy consultation with industry stakeholders. From this, the main outcome has been two orders: the Road Transport and Distribution and Long Distance Operations Road Safety Remuneration Order 2014 (Road Transport Order) and the most recent Contractor Driver Minimum Payments Road Safety Remuneration Order 2016 (Payments Order).

The tribunal had only been established for 14 months when the Abbott Coalition government in 2013 contracted Jaguar Consulting to assess the RSRT’s operation.
In April of that year, Jaguar Consulting reported that the tribunal had achieved little of a concrete nature (it was yet to issue the 2014 order).

For the Jaguar report authors, only evidence of a decline in collisions and fatalities among truck drivers would have been valid indicators of whether the RSRT had improved road safety. Given that the RSRT had been in operation for such a short time and had yet to make any orders, that sort of data did not yet exist.

The Jaguar report did provide data showing that heavy vehicle collisions and fatalities had declined in recent years by a similar proportion to other forms of road transport. It attributed this to improvements in road safety generally. However, the the latest data on which it drew was from 2012, prior to the establishment of the RSRT.

In making its first order in 2014, the Road Transport Order, the RSRT set out minimum entitlements and requirements such as safe driving plans, payment time, drug and alcohol policies, training, whistle-blower protection and dispute resolution. The only specific provision regarding remuneration was Part 4, which imposed a requirement that when owner drivers issue invoices for payment they must be paid within 30 days.

The payment order in 2016, now the subject of considerable political discussion, established national minimum rates and unpaid leave to come into force on April 4, 2016.

It is not surprising that some owner drivers are anxious about this payment order and want its operation delayed. These drivers are probably among the most poorly remunerated in the industry and have extensive debt wrapped up in their trucks. Many are making a marginal living at best.

However, this situation cannot go on forever. Their situation will not improve until the supermarket chains, product manufacturers and other organisations at the top starting negotiating decent pay into their contracts. If the RSRT is abolished, these corporations will continue to avoid responsibility.

To assist in this transition, the federal government should be looking at developing a structural adjustment policy to ease the concerns of owner drivers as change occurs. Instead, the government is proposing to abolish the RSRT and transfer its powers to the NHVR.

The NHVR is a national body set up by an intergovernmental agreement between federal, state and territory governments. It relies upon matching legislation passed in each jurisdiction. Gaining agreement to substantial changes in its role cannot be done overnight or by the stroke of a pen in Canberra.

If, as the National Transport Commission said in 2008, the remuneration of drivers is linked to safety outcomes, owner driver safety will remain a long way off.

Author: Louise Thornthwaite, Senior Lecturer, Department of Marketing and Management, Macquarie University, Macquarie University