Ahh, isn’t that nice, an Easter egg from Bob Carr and his Treasurer, Mike Egan. Our well-connected new contributor “Easter Bunny” has filed an interesting before and after analysis of the latest tax grab by the Carr Government.
Well, Boilermaker Bill got the first take right on the NSW mini-budget: the one Treasurer Michael Eagan used to tax himself on his investment property, but missed Kiwi Bob, the Premier who’s retirement hole is deep in New Zealand’s tax-free South Island.
But a careful second and third take reveals some interesting fallout. Does benefitting 30,000 or so first home buyers really outweight hitting 250,000 people (voters) with land tax for the first time, and threatening them and a few more with the stamp duty on sales proceeds from investment properties?
Hmmm, interesting politics. And with the concession on stamp duty eliminated at $600,000, how many people will really be helped when the median home price in Sydney is around $525,000? The benefit to first home buyers could very well be greatest outside of Sydney and, with the investment property market already slowing, who is going to be hurt? Owners/investors, or the big boys, the Meritons, Australand, Stockland, Mirvac and the like?
Egan boasted that he would help slow the market: well slow it he will. It could very well go to sleep for a while until the financial underpinnings of the market become clearer.
Meriton’s Harry Triguboff signalled his pain last week by revealing that he is raising $400 million from the ANZ bank to provide two year vendor finance loans to people who want one of his 1,000 or so apartments, townhouses he’s holding right now.
The reason for the loan: the Loan to Valuation ratios set by the banks for lending on Meriton-style properties has been falling: meaning more and more people have to find more and more money to invest in one of Harry’s versions of the Great Australian Dream. Obviously they can’t, so more and more of Harry’s dreams remain unsold.
The selling end is going to be soft for a while until July when the new sales duty starts, and will then probably dry up as investors sit and hold and wait to see what happens. New sales will come to a halt as investors assess the impact and whether there will be a firesale later in the year from overextended developers.
Off the plan purchsers will have a good incentive to walk away: saving stamp duty on their purchase, and avoiding duty on any future sale. Many investors still committed to off the plan deals will simply look at the losses from walking away, compare them to the stamp duty from buying and selling and make their decisions accordingly.
It’s not likely to help the Meriton’s of NSW, nor the NSW government which will see a sharper fall in stamp duty if there is is an upswell of cancellations and failed sales.
The banks are also not likely to be very happy because it will require them to put tougher Loan to Valuation ratios in place. Some of their customers, if they sell after July 1, could very well be looking at actual losses on recent property deals. That will be one way of avoding the, if there’s a rout in values.
The best Egan could do to defend the tax was to say that the stamp duty is a tax deduction and only half will apply. The land tax sting is going to be quite a political nasty. Egan has effectively joined Costello in taxing people’s retirement nest eggs (on top of the Capital Gains Tax). Judging by the reaction of friends since the budget, there are quite a few upset voters in NSW.
With a graduated scale, NSW will have a low land tax by Australian standards: 1.4 per cent at the top rate, Compared to 5 per cent in Victoria and more than three per cent in Queensland. But the tax will be a political nasty, catching 250,000 or so people for the first time. Owners selling properties above $3 million will be hit with a new tax, but who cares about them. The Sydney Morning Herald obviously does with a bleat this morning about a woman in Bellvue Hill selling her house sooner rather than late with a $4 million price tag. Makes you weep, doesn’t it.
The general tone of the commentary in the major papers in Sydney today was pro-property developer and pro-investors, as you’d expect. But the headline on the Annette Sampson piece in the SMH: “Message to buyers – you’re not welcome in NSW” was over the top and far too hasty a judgement.
But nothing from stockbrokers, saying buyers welcome, because that’s where money is going to head now: As we saw with Rupert Murdoch’s share swap bolt overseas, when there are share-for-share deals, there’s no capital gains.
Of course, the canny investor can try the following lurk: sell your house (the principal place of residence) and move to the investment property for a while, making that the principal place of residence, and then sell that. That is supposedly the only way of avoiding the full whack of capital gains tax, but it is risky andwill be knocked off if it becomes the norm.
If you have a few investment properties, then quite a few moves are on the cards, or you sit and hold and try and recover the propesctive tax through higher rents. But with a soft rentil market from an overhang of properties in the next year or so, that will be a tough ask.
Four or five per cent on bank shares will be better than no gain on property and full-franked dividends will lower your tax bill anyway. Investing in super will suddenly get popular again for the same reason: a less draconian tax bill. But it will be a slower process than in property where the instant hit and sudden elevation to ‘expert’ status in Sydney on the back of one of two deals a few years ago, will be just a memory for some while.
Other states will watch with interest at the impact in NSW and flirt with the idea of following suit. The Bracks Government in Victoria is the most cash-constrained, so expect a move there. The overhang in the Docklands area might temper their hand though.
And you can depend on Queensland not following suit, polishing off the white shoes and heading to NSW to plug the attractions of investing in a low tax property market. Expect that to flourish, and for more tears because the southern Queensland property market is the great swamp for investors. Only the promoters, their advisers and the Queensland Government do well out of investment properties in the Deep North.
And to consider that NSW had $376 millions sliced off its take from the GST by the Grants Commission and re-directed towards the poorer states like Queensland. The irony is considerable. Now low tax Queensland, which subsidises retail petrol prices to the tune of $800 million ayear, some of it with money from NSW, will be the beneficiary of yet another tax slug in NSW.
There’s just no justice in being a resident of NSW anymore. But Bob Carr doesn’t care. His retirement bolt hole in the South Island of NSW is looking even better. There’s good politics in that. For Bob, of course.
Now, here is the earlier column filed by the Easter Bunny on April 5 before the mini-budget was unveiled:
Here comes the Bob Carr Easter sting
You can’t help wondering about this Tuesday’s ‘mini-budget’ from the most successful Government in Australia of the last decade is looking like yet another political stunt, driven by an increasingly panicky Bob Carr Government.
After all, the fact of a budget deficit for the 2003-2004 financial year isn’t new news. It’s been officially known since December 23 last year when Michael Egan, the NSW Teasurer, wished all us six million or so NSW people, a scroogish Happy Christmas with news of a $275 million deficit in his mid-year review of the budget.
And while news of the Grants Commission cutting $376 million from NSW this year and in the succeeding years was something of a surprise to Carr, the Government will still get around $120 million more than last year from the Grants Commission: it’s just the amount sought by NSW has been trimmed.
A mini budget pre-Easter is a month ahead of the full budget in May and will allow Government departments to get ready and apply the changes from July 1, according to Bob the Premier. But what that really says is that the NSW public Service and the relevant ministers are slow coaches and couldn’t run a Sydney train system on time.
No, I think were are in for a little stunting and the parading of Carr-induced hairy-chested hacking and slashing in the public service.
Already Crikey hears the Department of Women, one of the trio of portfolios held by Sandra Nori, who is under growing pressure to keep her inner-Sydney seat after the Greens did even better in the local government elections. The Women’s Department is likely to be absorbed into another portfolio.
A move that won’t go down well in the inner city seats of Bligh, Port Jackson ( Nori) and Drummoyne where many upwardly mobile women are voters. Nori’s other portfolios are Sport Recreation and Tourism. Not much synergy there!
Perhaps a portfolio switch so Bob the Premier so he can appear all warm, caring and sensitive.
But the savings are likely to be tiny from this sort of reorganisation. The big gains will come from Education, Health and Transport.
Although the Government says more will be spent in these areas, what’s likely to happen is a slashing in the back offices and Headquarters, while leaving untouched and even increased, front office and interface staff ( not my words) such as station staff and drivers and guards in the railways, teachers in education and doctors and nurses and hospital beds in health.
What looks like happening is that the various Area Health groups will be amalgamted into much larger groups with resourcing of hospital and medical supplies either merged or contracted out in some areas.
Staff cuts will, according to the Government, generate savings which will be redeployed into the problem areas in each portfolio.
For example Bob has to find the $400 million or so he needs to meet last year’s campaign promise to lower class sizes for Kindie and Year 1 children: a promise Bob says is still on. All very predictable and very Carr-Egan symbolism. But the best test of just how bad the problem is will be how the Government deals with its long time ban on getting rid of staff in some key areas of the government and its so-called operating companies like Sydney Water, the electricity generating authorities, the energy distributors and Sydney catchment.If the ban goes and people go, then Carr-Egan are serious.
While restructuring and deployment and retraining have been allowed, the authorities have not allowed to move those people right off the payroll: Getting rid of displaced public servants would save around $17 million a year according to recent estimates, but allowing the operating companies and government departments to go for full blooded restructuring programmes through mass redundancies, while costing more initially, would generate more than decent savings.
So will Bob the Premier take on the NSW Labour Council and its friendly, but aggressive head, John Robertson.
White collar unions with deep membership in the Government’s 320,000 public servants now dominate the Council. So expect a lot of noise.
The energy companies, especially the distributors, having been anxious for years to make deep cuts in their staff numbers: but also
candidates to pay for the mooted for the re-imposition of the $100 million a year ‘distributors levy’ lifted two years ago.
But next Tuesday’s smoke and mirrors show raises another question: Just what has happened to the flood of money from stamp duty since the Carr government came to power in 1995?
How come the biggest property boom we’ve experienced, hasn’t allowed the govermnment to build up its reserves for a time when things start to slow.
Well, Bob Carr did boast on ABC StateWide last Friday night that his governmment has cut the state’s debt by $10 billion, with an annual interest savings of $1 billion, and according to the Premier spending on Health has risen 77 per cent, Education 68 per cent and Transport 61 per cent in the same time.
So why the problems in these three areas after all this heavy spending?
Well its been money badly spent because weakness in these three portfolios have made the Carr Government extremely vulnerable. Admittedly it’s early in the political cycle; a state poll is still 35 months away. But the Liberals under boyish John Brogden seem to have the measure of Bob’s mob at the moment.
And, it’s not as though slipping into a deficit this financial year, and possibly next year is going to cause the rating agencies to downgrade NSW. It’s Triple A rating is the highest, and Bob’s right when he says much has been spent on reducing state debt. It’s just that there’s been just so much money spent on pie in the sky projects that had a political imperative, and not an economic one.
In a nice little feature last week Sydney’s Daily Telegraph went through how much the Carr-Egan financial machine had wasted since 1995: their figure around $3.3 billion.
But, more importantly the Tele identified a total of $4.4 billion in windfall gains since 1995, driven mostly by stamp duty being higher because of the property boom.
They also identified $401 million in savings, which the Tele pointed out would push the budget back towards balance and obviate the need for a slash and burn approach.
And then there’s the sophisticated raising of the non-budget operating companies balance sheet by Treasurer Egan and his officers over the last three or so years.
Dividends from these groups have risen dramatically, not because they have been more profitable, but because Egan has spotted a lot of undergeared balance sheets and has forced the various authorities to gear up.
Roughly put it works like this: An authority might have a lot of assets on its books. These are ungeared or carry very little debt. What Egan has done is to direct the boards of these authorities( Governance, what governance? Transparency, what transparency?) to revalue these assets, and then raise a loan (gear up) from the NSW Treasury Corporation.
The higher interest payments generate more revenue for the NSW Treasury and Egan’s budgets.And the Government also gets more money in what are called ‘tax equavalents’ or the amount of money the authorities will pay to the Treasury instead of paying tax to Canberra.
Those ‘alert’ financial watchdogs, the various credit rating agencies, are happy because even though the authorities have higher debt, it is within the parameters set for NSW’s triple A credit rating and also covered by higher asset levels and higher4 cashflows.Simple, really!
But this little trick can’t be done more than once: for example, Sydney Water, one of the biggest State Operating Companies that are off balance sheet and part of the Egan shell game, will pay the NSW Government $588 million in dividends and $230 million in so-called tax equivalents. That’s the amount the SOCs pay the Government instead of paying company tax.That was revealed in the Independent Pricing tribunal decision in 2003 giving Sydney Water a price rise for the two years to 2005.
It would be embarrassing if Egan lifted charges like this, which would force the SOC’s to approach IPART again for a mid-term, price rise.
But Egan and Carr have plans to corporatise more authorities and some of the state’s holdings of forests: so more asset sales are obviously slated.
That will bring another confrontation with the trade union movement which defeated the last attempt to sell off the state’s power industry a few years ago.
No doubt Carr and Egan will blame Canberra for the nasties this week, but the blame lies equally with them.
Carr and Egan are set on chopping, slashing and hacking to make as much noise as possible to try and provide a circuit breaking to the ongoing bad news coming, with the Liberal Opposition’s help, in health, transport and education.
It seems taxpayers in NSW are once again going to pay for the political convenience of Bob Carr and his Government. But like John Howard in Canberra, facing down Iron Mark, there’s a continuing sniff about the NSW Labor Administration that a bit of harsh, but necessary medicine from Doctor Mike Egan and Nurse Bob, won’t eliminate.