Tag: Treasury

Government Consults on National Housing Finance and Investment Corporation

The Government, late on Friday night (!) before the school holidays, has issued a consultation on the formation of a new entity to help address housing affordability. The National Housing Finance and Investment Corporation is central to the Government’s plan for housing affordability.

Actually, this simply extends the “Financialisation of Property” by extending the current market led mechanisms, on the assumption that more is better. Financialisation is, as the recent UN report said:

… structural changes in housing and financial markets and global investment whereby housing is treated as a commodity, a means of accumulating wealth and often as security for financial instruments that are traded and sold on global markets.

So, we are not so sure.  Also, we are not convinced housing supply problems have really created the sky-high prices and affordability issues at all.  And, by the way, the UK, on which much of this thinking is based, still has precisely the same issues as we do, too much debt, too high prices, flat incomes, etc.

Anyhow, the Treasury consultation is open for a month.  We will take a look at the three elements to the proposal:

  • The National Housing Finance and Investment Corporation (NHFIC) – a new corporate Commonwealth entity dedicated to improving housing affordability;
  • A $1 billion National Housing Infrastructure Facility (NHIF) which will use tailored financing to partner with local governments in funding infrastructure to unlock new housing supply; and
  • An affordable housing bond aggregator to drive efficiencies and cost savings in the provision of affordable housing by community housing providers.

They argue that Australians’ ability to access secure and affordable housing is under pressure and that housing supply has not kept up with demand, particularly in our major metropolitan areas, contributing to sustained strong growth in housing prices. This is impacting the ability of Australians to purchase their first home or find affordable rental accommodation.

The average time taken to save a 20 per cent deposit on a house in Sydney has grown from five to eight years in the past decade, while the time taken to save a similar deposit in Melbourne has grown from four to six years over the same period. Half of all low-income rental households in Australia’s capital cities spend more than 30 per cent of their household income on housing costs. Meanwhile, across Australia, community housing providers (CHPs) currently provide 80,000 dwellings to low-income households at sub-market rates, and around 40,000 Australians are currently on waiting lists for community housing and an additional 148,000 are on public housing waiting lists.

The National Housing Finance and Investment Corporation is central to the Government’s plan for housing affordability

In the 2017–18 Budget, the Government announced a comprehensive housing affordability plan to improve outcomes across the housing continuum, focused on three key pillars: boosting the supply of housing and encouraging a more responsive housing market, including by unlocking Commonwealth land; creating the right financial incentives to improve housing outcomes for first-home buyers and low-to-middle-income Australians, including through the Government’s First Home Super Saver scheme; and improving outcomes in social housing and addressing homelessness, including through tax incentives to boost investment in affordable housing.

The Government’s plan includes establishing:

  1. the National Housing Finance and Investment Corporation (NHFIC) — a new corporate Commonwealth entity dedicated to improving housing affordability;
  2. a $1 billion National Housing Infrastructure Facility (NHIF) which will use tailored financing to partner with local governments (LGs) in funding infrastructure to unlock new housing supply; and
  3. an affordable housing bond aggregator to drive efficiencies and cost savings in CHP’s provision of affordable housing.

These measures are important but can only go so far in improving housing affordability. As noted by the Affordable Housing Working Group (AHWG), further reforms to increase the supply of housing more broadly have the capacity to improve housing affordability and alleviate some of the pressure on the community housing sector. To this end, they would be complemented by the development of a new National Housing and Homelessness Agreement with an increased focus on addressing housing affordability.

The Government’s objectives for the NHFIC reflect its priorities to improve affordable housing outcomes for Australians. The NHFIC intends to grow the community housing sector, and increase and accelerate the supply of housing where it is needed most.

Governance of the National Housing Finance and Investment Corporation

Entity structure – The NHFIC is expected to be established through legislation as a corporate Commonwealth entity. It will be a body corporate that has a separate legal personality from the Commonwealth, but will be subject to an investment mandate prescribed by the Treasurer that reflects the Government’s objective of improving housing outcomes. It is currently envisaged that both the NHIF and the affordable housing bond aggregator functions would be established as separate business lines within the single corporate entity. The final structure of the NHFIC will be determined in accordance with the Commonwealth Governance Structures Policy administered by the Department of Finance. The Governance Structures Policy provides an overarching framework to ascertain fit-for-purpose governance structures for all entities established by the Government. The NHFIC Board may also engage third-party providers with the requisite expertise to provide treasury, loan administration and other back-office support for its bond aggregator and/or NHIF business lines.

NHFIC Board

The Government intends to appoint an independent, skills-based Board to govern the NHFIC. Board members are expected to be selected by the Government on the basis of expertise in finance, law, government, housing, infrastructure and/or public policy. The Board will be responsible for the entity’s corporate governance, overseeing its affairs and operations. This includes establishing a corporate governance strategy, defining the entity’s risk appetite, monitoring performance and making decisions on capital usage. The Board will be responsible for ensuring that investment decisions made for the NHIF and the bond aggregator comply with the NHFIC investment mandate. The Board will also ensure that the NHFIC is governed according to best-practice corporate governance principles for financial institutions, including compliance with the Public Governance, Performance and Accountability Act 2013 (PGPA Act).

The affordable housing bond aggregator

The NHFIC will also operate an affordable housing bond aggregator designed to provide cheaper and longer-term finance to CHPs. CHPs are an important part of the Australian housing system. They provide accommodation services for social housing, managing public housing on behalf of state and territory governments. They also own their own stock of housing, which they offer to eligible tenants at below market rents. CHP tenants range from people on very low incomes with rents set at a proportion of their income (generally 25 to 30 per cent) to tenants on low to moderate incomes with rents set below the relevant market rates (usually set at 75 to 80 per cent of market rents).

Many CHPs (over 300) are registered either under the National Regulatory System for Community Housing (NRSCH) or other state and territory regulatory regimes (which is the case in Victoria and Western Australia).

Although the community housing sector has grown over recent years, it remains relatively small at around 80,000 properties (less than 1 per cent of all residential dwellings) in 2016. This is compared to more than 2.8 million properties (around 10 per cent of all residential dwellings) in the United Kingdom in 2015. There are substantial barriers to the community housing sector achieving the scale and capability necessary to meet current and future demand for affordable rental accommodation. These include the fragmentation of the sector, its limited financial capability (including the degree of financial sophistication), and the funding gap — the inability of sub-market rental revenues to cover the costs of providing affordable housing — which constrains the extent of services that CHPs can offer.

Bond aggregator model

The bond aggregator aims to assist in addressing the financing challenge faced by the CHP sector. It improves efficiency and scale by aggregating the lending requirements of multiple CHPs and financing those requirements by issuing bonds to institutional investors. The bond aggregator will act as an intermediary between CHPs and wholesale bond markets, raising funds on behalf of CHPs at potentially lower cost and over a longer term than traditional bank finance (which generally offer three to five-year loan terms). This structure will provide CHPs with a more efficient source of funds, reduce the refinancing risk faced by CHPs and will reduce their borrowing costs. This should enable CHPs to invest more in providing social and affordable rental housing.

However, the bond aggregator alone will not close the funding gap experienced by CHPs. This will require ongoing support from all levels of government. In their respective reports, the AHWG15 and Ernst and Young (EY) both highlight the important role of the bond aggregator, while noting that it is only a partial solution to closing the funding gap for CHPs.

Key findings of the EY report

Analysis undertaken by EY for the Affordable Housing Implementation Taskforce in 2017 found that an affordable housing bond aggregator is a viable prospect in the Australian context and recommended a number of design features. EY found that a bond aggregator could potentially provide longer tenor and lower cost finance to CHPs. The interest savings could be in the order of 0.9 to 1.4 percentage points for 10-year debt (depending on the level of Government support).

Furthermore, EY estimated that the CHP sector will need to access around $1.4 billion of debt over the next five years, which should provide the necessary demand and scale needed to support affordable housing bond issuances.

‘Mortgage buffers’ will protect households from rate rises: Treasurer

From The Adviser.

Treasurer Scott Morrison has said that interest rates are “obviously” going to rise in the future but that many home owners would be able to avoid mortgage stress thanks to “mortgage buffers”.

Speaking on Paul Murray Live on Sky News on Wednesday (6 September), Treasurer Scott Morrison was asked about “mortgage stress”.

Mr Murray said: “[W]e know mortgage stress is a very significant issue for an awful lot of Australians [and] rates have never been lower…. How big of a concern to you is it that the downside of growth is that (at some point) interest rates go up and there’s an awful lot of people who, as they say, have no margin to move within?”

In response, Mr Morrison stated that while rates “are obviously more likely to go [up] than down”, there would “obviously” be an interest rate “event” coming “at some point”.

However, he added that this scenario would not necessarily lead to mortgage stress.

Mr Morrison said: “[T]he sort of scenario you’re forecasting is one where the economy has improved; wages [are] improving, unemployment is going down, so there’s a lot of compensating factors to that. The other thing about the housing market, particularly housing debt, is [that] in the main, many Australians have been getting ahead of their mortgage, so there’s a reserve capacity to draw on their mortgages and this is demonstrated in numbers from the Reserve Bank and the banks themselves.

“Australians have taken the opportunity, in the main, to try and get ahead of their mortgages and that’s a good thing. So, they’ve built a bit of a buffer for that type of event taking place (and at some point, obviously, that’s going to happen), but Australians have been pretty prudent.”

The Treasurer continued: “But the things that they can’t control are things like interest rates … electricity prices, and that’s why we have to do everything within our power to put downward pressure on them.”

Mr Morrison’s comments follow on from the Reserve Bank of Australia’s decision to hold the cash rate at its record low level of 1.5 per cent for the 13 month in a row and amid growing scrutiny and regulation on interest-only lending.

Speaking at the Reserve Bank board dinner held on Tuesday (5 September), RBA governor Philip Lowe said: [T]he RBA has worked closely with APRA to ensure that lending practices remain sound. Rightly, APRA has had a strong focus on loan serviceability calculations.

“In some cases, loans were being made where the borrower had only the slimmest of spare income. APRA has also introduced restrictions on growth of investor loans and restrictions on interest-only lending. This has been the right thing to do.”

Mortgage brokers are also increasingly being asked to provide detailed reasoning as to why they are placing a mortgagor into an interest-only loan and ensure that consumers can afford their repayments.

Many of those in the industry have outlined that mortgagors on interest-only loans should have a buffer of between 2 per cent and 3 per cent to protect against rate rises.

For example, CBA CEO Ian Narev stated at the Aussie conference last month that “the nature of regulation is such that [in] the low interest rate environment there is a buffer to make sure that if interest rates go up, you can still service that loan”.

Noting that the buffer is about 2.5 per cent currently, Mr Narev added that brokers “obviously have to be careful never to stray into financial advice”, stating that the conversation brokers need to have with customers is: “If rates go up — and we know from the test that you are going to be able to afford it — but what are you going to need to stop in order to repay, assuming your wages aren’t going up? And is everyone comfortable with the levels of debt?”

He said: “If the people in this room [i.e., brokers] and the people in the banking system are doing the right thing by the customers, if they are thinking about the long term and having the conversations with the customers to make sure that [if] rates could go up, they will be comfortable, then the lender is going to do it.”

Likewise, Digital Finance Analytics principal Martin North has previously told The Adviser that both brokers and banks have obligations to ensure that there is “detailed analysis” of household expenditure to maintain a 2–3 per cent buffer.

APRA Reach Extended To Non-ADI Lenders

The Treasury has released draft legislation for consultation which extends some of APRA’s powers to some non-ADI lenders.  This is an important move, not least because we are seeing signs of non ADI lenders expanding their market footprint as regulators bear down on the larger mainstream players. Smaller non-ADI’s with assets of below $50m appear to be exempt.

The consultation on the draft Bill will close on Monday, 14 August 2017.

It covers the “conduct of a non-ADI lender relating to lending finance including the lending of money, with or without security or any other activities which either directly or indirectly result in the funding or originating of loans or other financing, which has the ability to cause or promote instability in the financial system”.

APRA will be able to apply different regulations to non-banks, a sub-section of these lenders, or to specific lenders. This does not include responsible lending responsibility which fall under ASIC. APRA will need to consult with ASIC when planning intervention (which highlights again the problem of role definition between APRA and ASIC).

Corporations with a stock of debt on their books, and a flow of debt through their books, which does not exceed $50,000,000, will not be registrable corporations for the purposes of the Financial Sector (Collection of Data) Act 2001 (FSCODA).

A new power will be provided to APRA to make rules with respect to lending finance by non-ADI lenders, for the purpose of addressing financial stability risks. APRA will also be provided a power to issue directions to a non-ADI lender, in the case that it has, or is likely to, contravene a rule. Appropriate directions powers and penalties will also be introduced for a non-ADI lender that does, or fails to do, an act that results in the contravention of a direction from APRA.

As a result of these amendments, corporations whose business activities in Australia include the provision of finance, or have been identified as a class of corporations specified in a determination made by APRA, will become registrable corporations for the purposes of FSCODA.

This will widen the class of registrable corporations under the FSCODA and will ensure that all non-ADI lenders, within specified parameters, are captured by these amendments.
Corporations which are not considered to be registrable corporations for the purposes of the FSCODA will include those corporations: whose sum of assets in Australia, consisting of debts due to the corporation resulting from transactions entered into in the course of the provision of finance by the corporation, does not exceed $50,000,000 (or any greater or lesser amount as prescribed by regulations); and whose sum of the values of the principal amounts outstanding on loans or other financing, as entered into in a financial year, does not exceed $50,000,000 (or any other amount as prescribed by regulations).

It is important to note that these powers do not equate to ongoing regulation by APRA of non-ADI lenders. APRA will not prudentially regulate and supervise non-ADI lenders as it does ADIs.

Under the Banking Act 1959 (Banking Act), a body corporate that wishes to carry on ‘banking business’ in Australia may only do so if APRA has granted an authority to the body corporate for the purpose of carrying on that business. Once authorised by APRA, the body corporate is an authorised deposit-taking institution (ADI) and is subject to APRA’s prudential requirements and ongoing supervision.

There are other entities who, like ADIs, provide finance for various purposes within Australia, but are not considered to be conducting ‘banking business’ as they do not take deposits. Given there are no depositors to protect, these entities are not required to be licensed as ADIs and prudentially regulated by APRA. These non-ADI lenders currently only have to report data to APRA in certain circumstances.

Under current law, APRA has significant powers with which to address the financial stability risks posed by the lending activities of ADIs. For example, concerns in recent years about residential mortgage lending have led APRA to take specific prudential actions to reinforce sound residential mortgage lending practices by ADIs.

APRA currently has no such ability with respect to non-ADI lenders. This gap potentially undermines APRA’s ability to promote financial stability, as lending practices that APRA has curtailed or prohibited for ADIs may continue to be pursued by non-ADI lenders.

To address this gap, APRA will be given new rule making powers which apply to non-ADI lenders. These new powers will allow APRA to make rules relating to the lending activities of non-ADI lenders, where APRA has identified material risks of instability in the Australian financial system.

These powers are narrow when compared to APRA’s powers over ADIs. This is an appropriate outcome, given there are no depositors to protect in non-ADI lenders. When exercising these powers, APRA will have to consider efficiency, competition, contestability and competitive neutrality consistent with section 8 of the Australian Prudential Regulation Authority Act 1998 (APRA Act).

A separate but related issue is APRA’s ability to collect data from registrable corporations under Financial Sector (Collection of Data) Act 2001 (FSCODA). The current definition of registrable corporation in section 7 of the FSCODA has limited APRA’s ability to collect data, as corporations which engage in material lending activity are occasionally technically not required to register. This has inhibited the ability of APRA and the Council of Financial Regulators (CFR) to properly monitor the financial stability implications of the non-ADI lender sector.

APRA’s ability to collect data from non-ADI lenders will be improved by an alteration of the definition of registrable corporations in FSCODA. The new definition will seek to capture entities who engage in material lending activity, irrespective of whether it is their primary business.

 

 

 

New (Weak) BBSW Rules Arrive

Treasurer Morrison has released new rules around the setting of the critical market benchmarks like bank bill swap rate (BBSW), which set pricing for many financial products. The rules cover how the BBSW is set and how the rate setting mechanism will be administered and licensed. However, the banks though still run the show. We think there is a case of an independent reference rate. And is the timing convenient, ahead of the banks appearance before the economic committee this week, to defuse the BBSW issue?

The Australian Securities and Investments Commission (ASIC) is already pursuing three of the four major Australian banks over unconscionable conduct and market manipulation in setting the BBSW from 2010 to 2012.

TraderMorrison took recommendations have been jointly developed by the Australian Securities and Investments Commission (ASIC), the Reserve Bank of Australia, the Australian Prudential Regulation Authority and the Commonwealth Treasury aka the Council of Financial Regulators (CFR).

To achieve the objectives outlined above, the CFR broadly recommends that:

  • significant benchmarks (broadly, systemically important benchmarks and those that will have a significant impact on investors) be covered by the regulatory regime;
  • significant benchmarks be identified in a publicly accessible list that can be amended;
  • administrators of significant benchmarks be required to hold a new, standalone, ‘benchmark administration licence’ unless granted an exemption, and the licence be supported by ASIC powers to write rules imposing obligations;
  • an ‘opt-in’ mechanism be created to allow administrators of non-significant financial benchmarks to apply to be licensed if they meet licensing requirements and doing so has value;
  • submitters to regulated benchmarks be required to comply with ASIC rules on regulatory matters related to benchmark submission, with benchmark administrators having primary responsibility for the operation of the benchmark;
  • ASIC be given the power to write rules to compel submission to a significant benchmark as a last resort when necessary to support market functioning;
  • the manipulation of any financial benchmark (significant or  non-significant) be made a specific criminal and civil offence; and Bank Accepted Bills and Negotiable Certificates of Deposit be expressly made financial products for the purposes of the offence provisions of Chapter 7 of the Corporations Act 2001.

So, the banks still maintain control of the BBSW. These changes are really pretty weak.

The Negative Gearing Salvos Continue

The ABC reported that “a Treasury document obtained by the ABC under Freedom of Information (FOI) shows most of the windfall from the property tax break goes to high-income earners.  The modelling said more than half of the negative gearing tax benefits go to the top 20 per cent of incomes in Australia. “Negative gearing benefits high-income families,” the document said.  The report stated those in the bottom 20 per cent were getting just over 5 per cent of negative gearing tax benefits”.

On the other hand, the Government has continued to argue “mum and dad” investors and Australians on average earnings are the main beneficiaries. “It does not change the fact that two thirds of Australians using negative gearing have a taxable income of less than $80,000,” Treasurer Scott Morrison said. This is of course axiomatic, but misses the point, because the whole idea of negative gearing is to offset interest costs and other losses to reduce total income, and therefore taxable income.  Mr Morrison played down the heavily-redacted Treasury submission. “The numbers in the document released by Treasury are not Treasury numbers, but are a summary of a report from an ANU associate professor, Ben Phillips, that Labor uses to justify their negative gearing policy,” he said.

The previously reported RBA FOI had rebutted one of the government’s principal arguments against negative gearing namely that there would be a collapse in home prices. The Grattan Institute had argued for negative gearing reform. You can read the DFA research archive on negative gearing here.

Worth then reflecting on earlier DFA analysis which showed how complex the negative gearing questions is.  We pulled data from the DFA household surveys, to examine the distribution of negative gearing. Our segmented surveys, show some of the nuances in behaviour. We start with age distribution. We find that households of all ages may use negative gearing, but more than a quarter are aged 50-59.  We see the DFA household segmentation in evidence, with a number of young affluent households active aged 20-29, especially using an investment property as an alternative to buying their own place to live. We discussed this before. As we progress up the age bands, we see a strong representation by the more affluent segments, including mature stable families and exclusive professionals. In later life, wealth seniors are also active, especially in the 60-69 year bands. So negative gearing is being used by households across all age groups.

Income-Dist-GearingOur survey suggests that negative gearing, whilst it is spread across the income bands, is indeed concentrated among more affluent households. Four segments, exclusive professionals, mature steady state, wealthy seniors and young affluent households contain the lions share of negative geared investment property. These segments are at different life stages, have different income profiles, and different strategies. For example the young affluent are often using investment property as a potential on-ramp to later owner occupied purchase, whereas wealthy seniors are all about income, and the others more wealth creation.

This analysis shows how complex the true situation is. Prospective changes are likely to impact different segments in diverse ways and there is plenty potential for spill-over impacts and unintended consequences. But the truth is, most negative gearing resides among more affluent households. The current settings are not correct.

 

Regulation of small amount credit contracts and comparable consumer leases

The Treasury has announced that the small amount credit contract (SACC) laws review panel is seeking views on the effectiveness of the laws relating to SACCs and whether a SACC database should be established. The panel are also calling for submissions on whether the provisions that apply to SACCs should be extended to consumer leases that are comparable to SACCs and, if so, how this would be achieved.

Closing date for submissions: Thursday, 15 October 2015

The review of small amount credit contract (SACC) laws and related provisions in the National Consumer Credit Protection Act 2009 was established on 7 August 2015 to consider the laws applying to SACCs and consumer leases which are comparable to SACCs.

The independent panel is undertaking a period of consultation to seek views on the effectiveness of the laws relating to SACCs and whether a SACC database should be established. The panel are also calling for submissions on whether the provisions that apply to SACCs should be extended to consumer leases that are comparable to SACCs and, if so, how this would be achieved.

The consultation paper can be found here.

Leveraged Property in SMSF Has Government Support

In a speech on Friday the Assistant Treasurer Josh Frydenberg “Speeches The Future of Super – Address to The Tax Institute” gave support to SMSFs and  leveraged property investments within them. 

SMSFs are a great feature of the Australian superannuation system – they promote engagement and competition in the market. Currently SMSFs account for around one third of all superannuation funds under management. As of March this year, there were over 550,000 SMSFs with over one million members. This is up five per cent from the previous year.

There are several ways in which the ATO is trying to help trustees satisfy their obligations.

Borrowing

An issue of particular relevance to SMSFs is the recommendation in the Financial System Inquiry on leverage.

David Murray’s report has recommended a complete ban on limited recourse borrowing arrangements in the superannuation sector.

I am sure this issue is something a number of you have a keen interest in.

It would obviously be inappropriate for me to pre-empt what the Government proposes to do on this issue, as it forms part of the broader Government response to Murray. However, I do want to emphasise that we have been considering the issue carefully. We want to make sure the approach we adopt is proportionate to the risks identified.

We have all heard unhappy stories of property spruikers providing inappropriate advice to people, encouraging them to start up SMSFs in order to gear up and buy a flash new apartment off-the-plan. Then the property price plummets or the rent dries up, and the member is left either wiping out their super balances by liquidating other assets, and possibly losing the family home they’ve offered up as a personal guarantee. There may also be liquidity issues when funds move into pension phase.

Where this happens, it is clearly troubling. But these stories are very much the exception, not the rule.

The available statistics on limited recourse borrowing arrangements, while not perfect, tell us that limited recourse borrowing arrangements remain a very small proportion of SMSF assets, and are more often invested in commercial property than in residential high-rises.

Forty two per cent of limited recourse borrowing arrangements – or around $3.5 billion – were invested in residential property in mid-2013. To put this in context, that means that only 0.07 per cent of Australian residential property – perhaps 6,500 dwellings – were held by an SMSF through a limited recourse borrowing arrangement in 2013.

Leverage always carries risks. Lenders recognise this in their loan to valuation requirements.

And while we do not intend to ignore these risks, we need to make sure that our response is proportionate to the problem the FSI identified.

Assisting Self Managed Super Funds

The Government recognises that the majority of SMSF trustees try to do the right thing with regards to their compliance with the superannuation laws. The ATO, together with the SMSF industry and professional associations, are looking to assist trustees comply with their obligations by providing them with timely access to information that is relevant for them, at a time when it is most suitable for them. This includes:

• on-line education packages for SMSF trustees created in partnership with professional associations;
• short on-line SMSF trustee videos;
• SMSF Assist, which allows users to type specific SMSF questions online or into an app, and receive information relating to that topic when they need it;
• a subscription SMSF News service that includes case studies, legislative information and common question and answers.

Professionals are also supported in providing services to their clients. SMSF auditors have been provided with an express resolution service called ‘professional to professional’ and free software to help them complete audits and work through scenarios and case studies.

The methods that are in place ensure that we have enough support mechanisms available to help not only the large funds, but SMSFs as well.

Treasury Releases Draft Of Foreign Resident Capital Gains Withholding Tax

The Government has released draft legislation for public comment. By way of background, on 6 November 2013, the Government announced that it would proceed with a 10 per cent non-final withholding tax on the disposal, by foreign residents, of certain taxable Australian property. The purpose of the regime is to assist in the collection of foreign residents’ capital gains tax liabilities.

Where the seller of certain Australian assets is a foreign resident, the buyer will be required to pay 10 per cent of the price to the Australian Taxation Office as withholding tax.  This obligation will apply to the acquisition of an asset that is taxable Australian real property; an indirect Australian real property interest; or an option or right to acquire such property or interest.

This withholding obligation will not apply to residential property valued under $2.5 million.  The purpose of this exclusion is to minimise compliance costs and ensure that the amendments are clearly inapplicable to most residential property sales conducted between Australian residents. This alleviates the need for purchasers to undertake the preliminary compliance obligation of determining the residency status of the vendor.

In October 2014, the Government released a discussion paper consulting on the design of the measure.

Closing date for submissions is Friday, 7 August 2015.

The Budget is Still Unfair – The Conversation

From The Conversation’s “Looking inside the sausage machine.” NATSEM’s analysis of the 2015-16 federal budget, the same as used by the Howard and Rudd–Gillard governments as a policy tool, has been likened by Treasurer Joe Hockey to a sausage machine.

What makes Hockey’s analogy particularly striking is its applicability to this year’s budget process. While the government threw away the very toughest bits of gristle from last year, a number of the most unpalatable cuts are still in the mince, plus some added sweeteners.

Like last year, we have made some calculations showing the impact of the budget measures on disposable income in July 2017, once most of the proposed indexation pauses have taken effect.

Our assumptions are conservative. We consider as status quo the repeal of changes to income tax rates and the low-income tax offset. Like last year, we do not factor in the abolition of the Schoolkids Bonus, or the Income Support Bonus, because this was not strictly speaking a budget measure.

Restricting eligibility for Family Tax Benefit Part B, or FTB-B, may lead to substantial losses of disposable income for families with school-aged children – even before the Schoolkids Bonus is taken away. Our figures show that a couple with two children aged 11 and 8, where one parent earns A$60,000 per year, would lose A$84.43 per week, or 7.4% of disposable income. A single parent with one child aged 8 and no private income stands to lose A$49.93 per week, or 10.9% of disposable income.

Pausing indexation of all FTB payment rates affects the most vulnerable families. A couple with no private income and one 3-year-old child would lose A$11.24 per week, or 1.8% of disposable income, while a single parent would lose A$8.80 per week, or 1.6% of disposable income.

Working families on modest wages face a double hit if indexation pauses apply both to payment rates and thresholds. A couple with one child aged 3, where one parent earns A$60,000 per year, would lose A$21.86 per week, or 2.1% of disposable income. The same family with two children aged 6 and 3 would have A$27.81 per week less to spend, a loss of 2.4 % of disposable income. The losses for a working single parent are A$20.75, or 2%, and A$26.69, or 2.3% respectively.

Families with teenagers will also forgo indexation and receive no compensation for the wind back of FTB-B. For a single parent with one child aged 14, this means a loss of A$63.70 per week – 13.4% of disposable income if the parent is unemployed and 7.4% on an income of A$40,000. A couple on income of A$60,000 with a 14-year -old could lose up to 79.61 per week, or 7.5%.

These figures represent maximum losses of disposable income. Couples may experience lower losses if both members work. Single parents may also have different outcomes if, for instance, their family tax benefits are subject to the maintenance-income test.

Importantly, we do not include the impact of changes to child care, but if families are not currently using child care and do not use it after the changes, then our figures will be a reasonably accurate guide to the impact on these families (for example, those with school age children not using after-school care).

What NATSEM measured

Our figures broadly agree with the cameo analysis produced by NATSEM, when tax changes and the Schoolkids and Income Support Bonuses are taken into account. The NATSEM microsimulation model comes to the fore, however, in its ability to model the overall impact of complex policy changes such as the Child Care Subsidy, and its estimation of distributional impacts for the whole population – not just selected family types.

The childcare package is the centrepiece of the budget for households. It is estimated to cost A$4.4 billion over 4 years. In isolation, the package appears progressive and increases assistance more for low and middle income families than for higher income families, with the subsidy for childcare costs reducing from 85% to 50% as family incomes rise.

To finance these reforms the government proposes to maintain some initiatives from the 2014-15 budget. These include freezing family tax benefit (FTB) rates for two years, adjusting supplements linked to the benefits and freezing the upper income test threshold so that more people lose payments as their incomes increase, and most significantly to stop paying FTB Part B when the youngest child turns six.

There is uncertainty about the overall size of these savings. Because these changes were factored into last year’s budget they are not identified as new measures in the 2015-16 budget. Just before the budget, the Weekend Australian estimated these changes would cut payments by A$9.4 billion over four years. In addition, the government is proposing new changes to family payments and paid parental leave that would save more than A$1.6 billion over four years.

Clearly, the total volume of assistance for families is going down. To assess the overall household impact of the budget, it is necessary to balance who wins from the generally progressive child care assistance proposals versus who loses from last year’s and the new savings proposals.

The impact

NATSEM analysed the impact of much more than the changes in family assistance and child care and include 25 changes in the first two Abbott government budgets, comparing these with what would have happened if the previous government’s policy parameters had been unchanged. This distributional analysis involves modelling policy changes for some 45,000 real families included in two years of the Australian Bureau of Statistics Survey of Income and Housing.

NATSEM produces distributional impacts for quintiles (20%) of households by family type – couples with and without children, lone parents and single person households. Both couples with children and lone parents lose on average, with the poorest quintile of couples losing just over A$3,000 a year or 7.1% of their disposable income and the poorest quintile of lone parents losing just under A$3,000 a year or around 8% of their disposable income. Most households without children – except the poorest 20% – are estimated to have minor increases in real disposable incomes by 2018-19.

The government in Question Time has emphasised that the NATSEM calculations do not include any “second round” impacts of the budget changes. That is, the policy package put forward by the government makes work more attractive both by reducing the cost of childcare but also by cutting benefits to families, giving them greater “incentive” to increase their hours of work to make up for the loss of FTB-B in particular.

Will the Budget increase workforce participation?

Asked about the modelling during question time, the prime minister said this omission meant the modelling was “a fraudulent misrepresentation” of the government’s budget because returning people to work was “the whole point of the policy measures”.

At one level, this sounds like a reasonable criticism. The explicit aim of the budget changes is to make increased hours of work more attractive to families.

However, Treasurer Joe Hockey has also conceded that “as a rule second-round effects are not taken into account” in any budget. This is because while there are likely to be some behavioural responses to these changes, the size of that response is unclear. A 2007 Treasury Working Paper points out that estimates of labour supply responses to tax and benefit changes can vary widely.

The Productivity Commission in its report on childcare that formed the basis of the proposed childcare changes in the budget was cautious about the size of the labour supply response to its recommendations, arguing that additional workforce participation will occur, but it will be small, and is estimated to increase the number of mothers working by 1.2% (an additional 16,400 mothers).

It is also worth pointing out that the economic parameters underlying the overall budget suggest that employment effects are not likely to be substantial. The labour force participation rate is projected to rise marginally from 64.6% to around 64.75% over the forward estimates, but the unemployment rate is projected to increase from 5.9% to between 6.25% and 6.5%, which implies a small fall in the proportion of the adult population who are actually employed.

Overall, while there will be some second-round positive effects it is highly unlikely that they will offset the losses in disposable income experienced by many families with children.

Governments should welcome the type of evidence-based policy analysis exemplified by NATSEM’s work, and ideally provide it themselves. It focuses the debate on concrete questions of how policy changes affect people’s lives. To criticise the straightforward modelling approach because it yields the “wrong” answer smacks of shooting the messenger. The government should be upfront with the public about exactly what is in the budget sausage.

Treasury Consults on Proposed Financial Institutions Supervisory Levies for 2015-16

The financial institutions supervisory levies are set to recover the operational costs of APRA and other specific costs incurred by certain Commonwealth agencies and departments, including the Australian Securities and Investments Commission, the Australian Taxation Office, and the Department of Human Services.

By way of background, in December 2002, the Government adopted a formal cost recovery policy to improve the consistency, transparency and accountability of cost recovered activities and promote the efficient allocation of resources. Cost recovery involves government entities charging individuals or non-government organisations some or all of the efficient costs of a specific government activity.

On 16 April 2014, Treasury released a paper responding to the submissions received on the methodology review and its conclusions informed last year’s discussion paper on the levies to be imposed in 2014-15. In the 2014-15 discussion paper, industry was further asked to provide Government with their views in relation to whether:  The 2014-15 levies should be calculated in the same way as the 2013-14 levies (Option 1), or; For the 2014-15 levies, the costs of all activities, except for APRA’s prudential supervision, should be allocated to the unrestricted levy component with the maximum cap for superannuation funds lowered to reflect the cost of SuperStream being met from the unrestricted component, and Pooled Superannuation Trusts to be levied at a lower rate to reflect the lower intensity of regulation required (Option 2).

Industry was also asked to provide Government with their views on whether the SuperStream levy payable should continue to be calculated on a net assets basis or with reference to the number of superannuation fund members. Following industry consultation, the Government elected to determine the levies payable in 2014-15 using the methodology outlined in Option 2. This methodology will be used to determine the levies payable in 2015-16.

APRA’s net funding requirements under the levies for 2015-16 is $125.1 million, a $2.7 million (2.2 per cent) increase relative to budget for 2014-15. $6.6 million of these costs will be met through other sources of APRA revenue (referred to as net cost offsets) and Government appropriations, including a special levy for the National Claims and Policies Database (NCPD). Taking into account $1.0 million in projected over-collected 2014-15 levies to be returned to industry, APRA’s underlying net levies funding requirement for 2015-16 is $117.5 million, an increase of $0.6 million (0.5 per cent) relative to budget for 2014-15.

A component of the levies is collected to partially offset the expenses of ASIC in relation to consumer protection, financial literacy, regulatory and enforcement activities relating to the products and services of APRA regulated institutions as well as the operation of the Superannuation Complaints Tribunal (SCT). In addition, the levies are used to offset the cost of a number of Government initiatives including the over the counter (OTC) derivatives market supervision reforms and ASIC’s MoneySmart programmes. $28.2 million will be recovered for ASIC through the levies in 2015-16.

Funding from the levies collected from the superannuation industry includes a component to cover the expenses of the ATO in administering the Superannuation Lost Member Register (LMR) and Unclaimed Superannuation Money (USM) frameworks. The estimated total cost to the ATO of undertaking these functions in 2014-15 is $18.3 million, of which $7.1 million was recovered through the levies. In 2015-16, it is estimated that the total cost to the ATO in undertaking these functions will be $17.9 million with the full amount to be recovered through the levies in line with the requirements of the Government’s CRGs.

The Department of Human Services administers the early release of superannuation benefits on compassionate grounds. The compassionate grounds enable the Regulator (the Chief Executive of Medicare) to consider the early release of a person’s preserved superannuation in specified circumstances. In 2013-14, the Early Release of Superannuation Benefits programme received 19,286 applications. This was a 7 per cent increase compared with the previous year. In 2014-15, the Early Release of Superannuation Benefits programme is forecast to receive approximately 20,500 applications. This will represent an approximate increase in volume of 6.3 per cent compared with the previous year.
The programme is expected to cost the Government $4.7 million in 2015-16 and, in line with the CRGs, this amount will be recovered in full through the levies.

Announced as part of the former Government’s Stronger Super reforms, SuperStream is a collection of measures that are designed to deliver greater efficiency in back-office processing across the superannuation industry. Superannuation funds will benefit from standardised and simplified data and payment administration processes when dealing with employers and other funds and from easier matching and consolidation of superannuation accounts. The costs associated with the implementation of the SuperStream measures are to be collected as part of the levies on superannuation funds. The levies will recover the full cost of the implementation of the SuperStream reforms and are to be imposed as a temporary levy on APRA-regulated superannuation entities from 2012-13 to 2017-18 inclusive. The levy payable is subject to the Minister’s determination. The costs associated with the implementation of the SuperStream reforms are estimated to be $61.8 million in 2015-16, $35.5 million in 2016-17, and $32.0 million in 2017-18.

The Treasury paper, prepared in conjunction with the Australian Prudential Regulation Authority (APRA), seeks submissions on the proposed financial institutions supervisory levies that will apply for the 2015-16 financial year. Closing date for submissions: Wednesday, 10 June 2015