This week in The Money Cafe, James Kirby and I discuss the following:
- Cutting ASIC’s budget during a royal commission: appears to be a bad idea.
- The tax puzzle: where did this surprise revenue kick come from?
- The government’s self imposed cap on tax is the stupidest thing Alan has ever heard.
- The AMP bloodshed rolls on.
- The massively tedious argument about female quotas diluting Australia’s boards.
- Lonely Planet in trouble.
- Trump’s Iran move spikes oil prices.
- A swag of listener questions, including a pretty forthright fact check for James.
Hello, I’m Alan Kohler, publisher of The Constant Investor.
And I’m James Kirby, Wealth Editor at The Australian.
And we are The Money Café.
The Money Cafe.
And here we are back in Melbourne after the budget lockup in Canberra, we’ve brought the weather with us.
Yeah, we have haven’t we?
It’s Canberra weather here.
People are coming into the café with hats and scarves on for the first time this year.
Yeah, and brollies.
Including me and you, you’ve got a brolly in the corner.
Yeah, but you’re bald, James, you need to have it.
I could wear a hat all the time if I had my way.
That’s right. I must say it looks very fetching on you.
Thanks very much, Alan, it goes with my coat, you see, that’s called accessorising. Are we going to do a podcast?
We’re going to talk about the budget.
We talked about it on Tuesday night but there are a few things.
And we’re going to talk about other things as well.
We are going to talk about other things.
But we’ll talk about the budget first.
Now, one thing we didn’t discuss on Tuesday night before we get onto the budget big picture again what about ASIC getting its budget cut. I mean, fair dinkum, in the middle of the Royal Commission where we need to crack down on the banks, have regulation, and they’re going to sack 30 people because their budget is getting cut. I mean, what do you think of that?
At face value it looks like a bad call. I mean, the million-dollar question is about ASIC and the Royal Commission, and I’m not in a position to answer it, I don’t know if anyone is really just yet but were ASIC really good and didn’t have enough power with the major financial institutions or did ASIC have plenty of power and they didn’t use it and on that basis that they were actually a poor performer. It’s not really clear just yet and there’s two sides to the debate.
Are you edging towards suggesting that cutting their budget will improve their performance?
No, I’m not, not at all, actually on this one I’m not. It’s a real surprise and as you say, in the middle of a Royal Commission which is unveiling, I think, some of the biggest scandals we’ve seen since 1980s probably.
So, maybe a mistake there by the Treasurer on one of the specific budget measures and of course he didn’t say it, he didn’t have a press release on it, he didn’t itemise it in the budget measures and that’s typical and I think it’s rotten that one government after another does that. You walk in, there’s 35 press releases, there’s mountains of paper, there’s people walking around and they don’t mention things they don’t want to say. They didn’t mention the ASIC cut and they didn’t mention the superannuation guarantee going back up to 10%.
And the ABC cut.
And the ABC cut, I think that might have been itemised, was it itemised?
Well it was obviously in there.
By that I mean was it in the measures?
I mean, that’s a disgrace.
I thought you might say that.
Not that I’m biased.
I know, well we all have to look after ourselves, Alan, in this world.
It’s a disgrace. Anyway, so the other detail you’ve been on about is reverse mortgage plan, now, what I was surprised about your comments on that was that it’s been around for 30 years, who knew?
It’s been around for 30 years and you know how much they’ve given out in 30 years? 30 million, that’s a million a year. Can you imagine, it must be a great job to actually work in there because you’d be doing absolutely nothing I imagine most of the year. But, the program remains in place since the 1980s so it’s not a new program it’s an old program. But, guess what? The government – and I think this is nothing short of comical really, a liberal government is announcing an upgrade and a return to mortgage banking by the government.
But, didn’t they a year ago say they wanted to help people out of their homes and into nursing homes?
They did, yeah actually last year they were helping people to go out of their houses and this year they’re helping people to…
Stay in their houses.
Stay in their houses.
So, new plan everyone, new rules, new plan, sorry.
To be fair, and we must always be fair…
No, I don’t think we should always be fair.
At face value it looks like a contradiction but it’s not because the downsizing plan was to encourage people to move out of bigger houses and into smaller houses but they’re still moving into a house and not moving into a tent, if you know what I mean.
Yeah, but you could be moving into a retirement village, that’s what my parents did, they downsized from a house into a retirement village unit.
Where they’ve been taken to the cleaners, but that’s another story entirely.
It is but actually while you’re on that subject one of the measures in the budget was about the aged care home plan, they’d give an extra 20,000 places and the vast majority of people would like to stay in their homes as long as they can and if they can actually get government assistance to do it rather than going into a retirement home they well. All the reports show it’s cheaper, it’s cheaper for everyone including the government to leave people at home for as long as possible.
Yes, of course it is, that makes absolute sense.
So, I thought that you could have done more but at least they did a step in the right direction there.
So, on the big picture of the budget I spoke to Chris Richardson of Access Economics, Deloitte Access Economics, this morning, and did an interview with him a short interview with him for The Constant Investor and he told me something I hadn’t thought of, didn’t realise, but you know how the money is all flowing in and the whole thing is the government suddenly got $8 or $9 billion a year extra cash coming in that this has actually suddenly appeared. Because, in the MYEFO last December they weren’t predicting it. Six months later or even less than six months later bang, they’ve got all this money. So, what happened in six months?
And what did Chris Richardson say?
And the answer is all the tax losses from the company’s tax losses from the GFC have run out.
Yeah, and it kicks back up, they kick back up.
Yeah, so the taxes have kicked back up even though – because, I was asking him and it’s been puzzling me. There hasn’t been a big lift in the economy, the economy is going along okay but it’s not huge, there hasn’t been a big lift in wages, company profits aren’t booming, they’re okay.
If that’s true, and I assume it is because Chris Richardson is the nearest thing to Mr Budget, isn’t he, really these days?
If that’s true then it’s a sugar hit, then they can’t expect it to be sustainable in any kind of fashion.
Well, it goes up and it stays up, like the tax went up.
Yes, but it won’t increase again, you were saying about the receipts coming in at 8% per annum and the economy growing at 3% per annum.
That’s right, so it won’t be another $8 billion next year, there won’t be any more surprises, you’re right, that’s it for the surprises. But, there has been this kick up because the tax losses have all gone. I think that was very interesting.
Very interesting. The other thing is about the taxes we should also just say, it’s worth bringing up this issue even though it’s hypothetical, and I’ll tell you what, it’s seriously hypothetical. But, if they were to get their tax package through, and if the new tax system that was outlined by the Treasurer got through between now and 2024, then we would have a much flatter tax system and it would be less progressive, true or false?
Well, of course, it’ll be three quarters of the taxpayers will be on 32.5 cents on the dollar which is virtually, it’s a flat tax.
Yeah, just about everybody.
But, and this is the point you’re making, I think, is that by 2024 when that’s supposed to happen we’ll have probably had three elections.
The chances of the Coalition still being in government are zero.
Not low, but zero.
I actually find it – I don’t want to say the word tiresome but I find it almost unfair to readers to write large amounts in a serious fashion taking these projections in any serious way because the governments don’t last very long and this one is only hanging by a thread. But, it was interesting, I mean cut to the chase, there’s actually no tax changes whatsoever except one tiny tax change coming in on July 1.
A tax cut of $530 a year on average or whatever.
Yeah, for the sub 90,000 group, and apart from the offsets that’s it but in terms of tax changes that’s it, the rest is theoretical.
Well, what they’ve done is just enough to keep the tax take, the tax receipts under 23.9% of GDP which is their self-imposed cap which I think is the most stupid thing I’ve ever heard.
Explain that, because it’s a suppressant of what?
Because the demands on the budget on the government expenditure are rising all the time, not only have they got the NDIS which is new, we’re now property funding disability which is really large, we’ve got a deficit as well, the health budget, there’s expensive drugs going on the PBS every year, the population is aging, there are requirements on infrastructure that are associated with…
I know there are requirements but explain why having a ratio is a problem, the ratio being the government taxes won’t be more than 23.9% of GDP?
Well, because that limits your growth effectively in tax receipts to the growth rate of the GDP which happens to be 3%. Now, maybe it’ll go up to 4% but it’s never going to be 5% to 6% because that’ll be a boom and the Reserve Bank will make sure that it doesn’t last whereas government expenditure is rising by 5.5% per annum, 6% or so, and that’s twice as much as the tax receipts can increase so it just kind of causes – they’re just locking in a problem it seems to me.
They’re locking in a problem that’s coming down the line but of course it will be someone else’s problem politically you’d have to think.
Well, you wouldn’t have to think that, then the Labor Party will come in and they’ll drop this 23.9 and they’ll say that’s very silly.
We’ll have to learn all their stuff.
We’re not going to do that anymore, that’s right. So, should we talk about something else?
Well, there’s questions on the budget later so we can go back some specifics on it. The big thing today, of course, is AMP, the auto-de-fé of the AMP Group.
What did you say, the auto-de-fé?
Is that Irish?
No, it’s Latin actually, but it just means the big nasty day for AMP about the AGM there, but of course they’re nearly all gone, aren’t they? I mean the Chairman has gone, the CEO and three board members are gone so…
Do you know what happened at the AGM, did they get the rounds of the kitchen?
I don’t know, actually, no I think it’s happening right now, it’s going to go for hours.
So, all the women have run away.
You reckon they ran away or they…?
Well, Patty Akopiantz did.
She was a surprise.
She was voted down, the other two, Kramer and the other person, were going to get voted off.
It would seem Patty did run and in a way, you mightn’t blame her, actually.
But see the funny thing is, if I may say, is the lady columnists on The Australian have been hopping into this subject saying that it’s all because of female quotas on boards, because a quota makes you hire dunces apparently. So, they’ve been going on about that at massively tedious length.
It was the time to review the issue, that’s for sure.
And the funny thing is now that David Murray, the new Chairman of AMP, has to hire women.
Under the quota, yeah.
Because there’s no quota however they cannot possibly have an all-male board, right?
No, they can’t.
So, now they’ve got five men on the board, that’s it, nothing, no women.
As we stand today, yeah.
As they stand today, so he’s got to hire at least two, almost certainly three, women. So, it’s a quota, right, and step up…
But, now that he’s in there people can make a career in there now because Murray – you would think if anyone can hold the line there it’ll be David Murray, and he will build a whole new regime, it’ll be a tough regime, it should be really interesting to see, assuming he still has all the skills and energy he had once upon a time at Commonwealth Bank. A couple of other running stories that kind of got lost because the budget always dominates the week but there’s actually some very juicy stories around. Did you see TPG?
So, they have said they’re going to have – well, they’ve announced some sort of unlimited plan, right?
It’s a fabulous advertisement, that’s for sure. So, they’re building a fourth network and which is very, very, very ambitious and it’s a new era network, and if any telco company is going to sort of break the hegemony of the big guys it’s going to be TPG. What they have said is for six months it’s totally free and then the next six months 9.99 per month while the big telcos are something like $50-$60 a month and they’re a little bit faster but I thought it was stunning.
It was always going to be disruptive but I think it’s going to be very interesting, you’re right.
But UBS came in and said I don’t like this at all, I don’t think they’ll make money from it, that’s the analysts. David Teoh, of course, doesn’t even talk to analysts. Apparently, he talks to some analysts but generally he doesn’t talk so he is not going to bother.
He doesn’t talk to journalists, that’s for sure.
Yeah, but he doesn’t even talk to most analysts I understand, but he won’t even bother defending that he will just go ahead and do it and it’ll be really interesting to see.
I’d do that if I was the CEO, I wouldn’t talk to journalists, you’d have to be mad, honestly. I don’t mind David Teoh, I think he’s great the way he doesn’t talk to anyone, good on him. He lets the numbers do the talking.
Yeah, I’m glad they all don’t do it but he is intriguing because of the way he operates. But, even if he doesn’t succeed he may have an impact like John Symon in Aussie Home Loans had once on the banks, that prices will come down for sure. Telstra and Optus, they’ll just say my god, we’re four times dearer than this TPG and they’ll respond.
Speaking about not making money you’ve seen Lonely Planet has gone bung.
Yeah, this is a great story. I mean, it’s a fabulous story because Lonely Planet of course is such a great success in its day and the Wheelers, Maureen and Tony, who now are so wealthy that they’re able to bankroll Wagner productions around Australia of The Ring regularly, this is their pet project, they sold to the BBC for 130 million pounds Stirling. The BBC made a really big mistake paying 130 million pounds Stirling for Lonely Planet and a couple of years later they sold it for 80 million to a Kentucky billionaire who made his money out of discount cigarettes, a guy called Brad Kelly.
Right, it turns out he paid too much too.
It turns out he should have stuck to the tobacco industry in Kentucky because it’s up for sale again.
For how much?
No number on it but we could safely assume it’s not going to be 80 million pounds so it’s declining before our eyes. 130 million from the BBC, they dropped 50 million pounds on it and it looks like this billionaire from Kentucky is dropping…
Well, it’s being killed by Expedia and all these other things, isn’t it?
It’s tough, it’s like all media, their problem is – and I include financial media – their problem is the stuff that’s free is regularly quite widely available, not as good of course but there’s a lot of it and especially in that area, travel and food bloggers, etcetera, there’s very low barriers to entry unlike our game, Alan. So, they’re really in trouble there at Lonely Planet. Yeah, oil, what were you going to say about that? Oil prices, that is.
Just the oil price went up because of the Iran thing.
The Iran thing is that Trump has basically yet again dumped on everybody basically, on his supposed allies.
Yeah, he’s pulled out of the deal. He had a deal with the rest of the world effectively and Iran, and now he has pulled out because he wants to suck up to Israel and Saudi Arabia.
But that’s all that’s left, that’s all he’s going to have, they are his only allies in this now, Israel and Saudi Arabia. So, the market thinks oil is going to jump in price, is that it?
There’s the hedge fund betting that oil will go to $150 a barrel, how about that?
Yes, that’s a big call. It’s half that now.
That’s a big call because it got to $147 at the peak just prior to the GFC.
Well, more to the point just prior to US shale oil coming on stream and that addition to the world’s oil supply caused the price to collapse to something in the 30s.
That’s why your Woodside shares aren’t on the same prices they were a long time ago though they are going up and even Santos is going up.
Santos has got a takeover offer.
That’s right, Santos is under offer, yeah, and the listed oil sector isn’t like it used to be but it’s worth knowing if you’re an active investor that there are serious money betting that the oil price will double from what it is today. Do you want to go and look at these questions which looked quite spicy I thought as I glanced earlier?
So, do you want me to read out this one from Gillian who is taking you down, James?
Yes, you can.
Good evening, says Gillian, I want to correct respectfully…
Respectfully as opposed to respectively, that’s a good start.
James Kirby on his comments on the 3rd of May 2018 show when he was answering questions, particularly the ones concerning the SGC, the super guarantee contribution. This SGC is paid on behalf of employees from employers, it does not come out of the wage that is paid, it’s an addition to wages. I think this needs to be corrected and made clear.
Yes, okay Gillian.
And then she goes on and on.
No, fair enough.
Many thanks, I love the show.
Okay, respectfully, Gillian, yes of course, I understand what you’re saying and of course it’s true and we do tend to rollick along here at The Money Café and I could have been more careful.
So, you’re grovelling, that’s good.
No, I’m just saying I could have been more careful in how I explained it but I understand, of course, that that is how it works. I suppose I could have said salary package because that’s really how it works, isn’t it, when you’re employing someone you’ve got to work in that SGC, as you say Gillian it annoys you and it annoys many employers but you have to do it because it’s legally mandated.
I must say, Gillian and James, there are a lot of employers who take the super out of the stated pay rather than it’s an addition to it, they’ll say your salary is whatever it is, 100,000…
Some people say that.
It’s optional, you can say your package is 100,000 including super or you can say your salary is 100,000 plus super and a lot of people do both.
Yes, we used to say, when we were hiring people once upon a time, you and I, at Business Spectator, we used to say plus super.
But, that’s because we were excellent employers.
We were just a joy to work for.
Hello James and Alan, great podcast, I love listening to you guys every week. We are a young couple, 25 years, and we’ve started investing in the stock market with a percentage of our income. I am an avid indexer so we only buy indexed funds. We have both recently changed our super to a low cost index based super. Are we not better off maximising our super contributions to 15% to get some tax benefits and invest more with our pre-tax dollars given that in both cases the money could be going towards index funds? Aside from the ability to access the money until retirement are there any other important factors to consider? Well, there certainly are, Andy. Thank you and look forward to hearing more from you guys. So, James, talk to us about the maximising super contributions to 15% because I want to say something about index funds.
Well, certainly yes, Andy, maximise your super contributions, of course. Now, there’s not much left to do there any more I’m afraid. When we’re talking about what they call concessional that’s a pre-tax super, you can only put away $25,000 a year, that’s the maximum these days, it used to be huge a few years ago. But, certainly given the choice of investing in index funds out of your hip pocket post tax money or through your super make sure number one, that you maximise your contribution if you can and you’re in the position to do that at 25,000 a year, and then should you wish to put all your – I would never put all my money into anything, by the way Andy, I mean that’s just kind of textbook investing that you diversify, but in terms of your accessing public markets, share markets etcetera or even bond markets, it’s a perfectly reasonable approach to go into index funds, yes. Make sure they’re different index funds in different houses as well just to give yourself some diversity there. Did you want to add to that, Alan?
I do, and I’m just calling up my calculator here because I want to tell Andy the difference between annual return. So, the market increases about 8% per annum, right?
Over what period of time.
Over the long term, right. So, if you’re an index fund you’re getting 8% per annum. So, if you save $100 a month for 40 years at 8% per annum starting with 0 you’ll end up with $350,000 after 40 years at 8% and $100 a month. Now, I happened to look at this morning’s Mercer fund manager ratings and the top performing fund in the past 12 months was something called Selector High Conviction Fund, it’s a retail fund for small investors.
Sorry, are these the top performing retail funds?
Yeah, this is the top performing retail fund for small investors.
And their return for the past 12 months was 30%, right, so 30% is a bit high.
You’re not going to get that every year.
There are a lot of funds getting to 25%, 20%, every year for a long time. So, just to see the difference between getting 8% in an index fund and 25% from a decent fund $100 a month for 40 years at 25% per annum gives you – I’m sorry…
We have an explicit ban on profanity, we agreed on that earlier.
I didn’t mean to say that, can you bleep that? Yes. I didn’t mean to do that. Yes, so the difference. Okay, same amount of money per month…
Invested in a different way.
Invested at 25% instead of 8% – so remember the 8% gives you 350,000, the 25% over 40 years gives you 95 million.
Yes, that’s great. You know what, Alan, that fund that gives 25% every year, will you give us the name of that fund so we can all invest in it?
It didn’t do that every year, there’s no way that fund did that every year.
No, I’m just saying the difference between…
No, I get what you’re saying, the difference between an active stock picker who’s really good…
Andy, you’re a young man, you’ve got a long time, you’ve got 40 years to go before you retire, you’re saving for 40 years, you don’t have to worry about just matching the market you can go for a slightly higher return.
You’re saying to Andy take more risk.
I’m saying give your money to somebody who is a good stock picker, who’s not just putting their money in an index but is actually picking stocks and good companies, this is what Warren Buffet does. Warren Buffet has become a billionaire because he has achieved 25% capital growth year after year for 50 years and I mean even if you got 15% – here’s 15%, Andy. 15%, $100 a month, 40 years, 3.1 million.
I think your broad thrust is welcome, Alan, and that is that remember, Andy, you’ll only do as well as the market with index funds and if you have three bad years in the market you’re going to have three bad years in your index funds.
No, but I suppose what I’m talking about is the power of compound interest which Albert Einstein called the most powerful force in the universe, and he is right.
But more than that is the stock picking, the active management as opposed to – yeah…
Well, that’s right and yes, it’s true that a lot of active managers don’t beat the market, that is true, and that’s presumably what Andy would say.
Yeah, but good ones do and I think that BT would be delighted with us this week, Alan, to mention that the BT Mega Trend this week is that active, that is successful active managers…
Well caught, James.
Successful active management will always beat index funds, Andy, but the operative word there is successful and the only thing I will say is that the managers who are very good change all the time. Okay, how about the question from Antonia which we’re going to have to try and be succinct on this because her question is ambitious, shall we say.
Okay, you go.
I’ll go. I need you, Alan and James Kirby, to spell out the 23.9% tax limit so that I get what that covers and what it excludes, that’s the thing about Morrison’s commitment that tax receipts will not be more than 23.9% of GDP. Is there anything we should know about that?
Well, it’s just tax receipts, not total receipts of the government which include a lot of other things, or a few other things…
Tax revenue is the most important and that, they have said, will not exceed 23.9% of GDP.
Okay, it’s a three part question. Second part, I also need to know what the differences are in actual expenditure from last year to this on the NDIS and super to this year and where those allocations are being used.
Okay, so according to the budget papers, Antonia, national disability insurance scheme expenditure 2017-18 7.8 billion, 2018-19 16.7 billion, 2019-20 20.7 and then so on, much higher. But, we’re talking about an increase from the current financial year from 7.8 billion to 23.6 billion over the next few years.
That’s on the NDIS. That’s a tripling of spending on the NDIS alone.
That’s the NDIS alone. So, I have written, and I think it’s true obviously, that the NDIS has become in a sense the core challenge of the budget at the moment, funding the NDIS.
This is the big factor weighing on the budget.
It’s the big factor, it’s kind of eating the budget essentially.
That is why some people would say they should have gone ahead with that tax increase of half a percent on the Medicare levy.
Of course, they should have.
Well, they didn’t, so there you are. The last part of Antonia’s question is no mention of plugging the 9 billion in unpaid super by companies to employees to meet their legislated obligations. Actually, Antonia, there was. It’s on page 19 of the budget measures under the treasury section, it’s called a firm stance on tax and superannuation debts and it turns out that they’re going to spend $133 million – they’re not going to spend on that but they’re going to give it to the ATO and that’s about tightening up on these superannuation debts on the unpaid super as I understand. So, there is an item on that and they are working on it. But, as far as I am concerned that’s kind of the bolt in the gate, really, I think they’ve got to change that whole thing about unpaid super, it just shouldn’t be possible to have unpaid super. Okay, the last question…
By the way did you notice that they’re going to ban cash payments above $10,000?
I did, I saw that.
It is, yeah. Did you notice that there was $3 billion attached to the illegal tobacco stuff, $3 billion.
Does anybody actually smoke official cigarettes anymore, does anybody smoke anymore?
That $3 billion has got to be rubbish, it’s one year, it’s next year, it’s got to be rubbish.
We used to call this Chop-Chop.
Chop-Chop, yeah. Well, I don’t know, I mean really where are all these people, they must be hiding.
I’ve never seen any Chop-Chop.
Hiding in the corner smoking illegal cigarettes, there you are. Question from Daniel, the last one. Are you able to confirm whether active ETFs following NTAs similar to a normal ETF like a Vanguard index checker or are they like listed investment companies and the share price can be a discount to premium? Thanks Daniel. Robin Bowerman of Vanguard is going to check that one out for us.
No, I know, I can tell you now.
He’s going to give the Vanguard answer, yes you can tell the Alan Kohler answer.
Well, I can tell you the correct answer.
Yeah, off you go.
Which is that an active ETF, just like a passive ETF, always has a price that is the same as the NTA because the number of shares on issue fluctuates according to the assets.
And that’s the whole point of an ETF and that’s why an ETF is different from a listed investment company because a listed investment company has a fixed number of shares on issue and so therefore an LIC can sell at a premium or a discount to NTA because the price is subject to supply and demand whereas an ETF the number of shares on issue rises and falls so therefore it’s always equal to NTA.
It’s an automatic stabiliser. So, Daniel, if you’re buying a listed investment company you try and get it at a discount to its NTA.
So, you don’t have to bother our friend, Robin Bowerman, now.
That’s good. Okay, well we’ll leave him alone this week. Great, I think that’s it for the week, Alan.
That’s right, now I’ve got to read the thing. Now, don’t forget you can subscribe to The Money Café on Apple Podcasts or your app of choice. While you’re there please leave a review or a rating because it helps everyone find the show. Send in a question and we’ll answer it in next week’s episode, the questions can be e-mailed to us at firstname.lastname@example.org or we can pick them up on Twitter, if you want to tweet them if you just put a hashtag #themoneycafe we’ll find it or what’s your Twitter thing?
That’s it, thank you, yes.
And mine is @alankohler which, if I may say, is much simpler.
You’ve made that point before, it’s too late to change it now, Alan.
Until next week, I’m Alan Kohler, Publisher of The Constant Investor.
And I’m James Kirby, Wealth Editor at The Australian.
Talk to you next week.