Stamp Duty Dilemma for Aussie States

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There is not a much of a lead to follow after Friday’s slightly downbeat day in New York trading. We’ll just have to make our own way then, won’t we?

Here’s something to think about: farm land. Granted, it has not exactly been a great year for managed investment schemes in the agricultural sector. But it’s not because the underlying assets-food, livestock, forests, fruit-are less valuable than expected. It’s because the structure of the schemes themselves was flawed.

There are two things to like about the idea of investing in farmland right now. First, with Timbercorp and Great Southern both going into administration, this is a hated asset class. You might be able to find some bargains (if you can find a business that makes both sense and money). The second reason is that Jim Rogers and George Soros are talking up farmland too.

The world’s population is expected to go from six billion to nine billion in the next forty years. Frankly, that sounds like way too many new mouths to feed. Arable land isn’t something you can buy down at the corner shops. But it is a fruitful world. And there is much multiplying.

So what’s the investment angle? “Land is scarce and will become scarcer as the world has to double food output to satisfy increased demand by 2050,” says Joachim von Braun in Fortune. He’s the director general at the International Food Policy Research Institute. “With limited land and water resources, this will automatically lead to increased valuations of productive land. And it goes hand in hand with water. Water scarcity will probably increase even more than land.”

Hmm. Well this could be a problem in Australia (the water). And of course, there is always the possibility that there is no way on God’s green earth the world can feed, clothe, fuel, and plasma-TV another three billion people. But it looks like we’re going to try!

By the way, we haven’t paid much attention to “Ute gate.” It looks like it’s just politicians doing what they always do: lying, cheating, and stealing when they think no one’s looking. Business as usual, isn’t it? But indirectly, you can notch another casualty up from the credit crisis.

That’s right. The whole thing started with car dealers struggling to find finance during the credit crunch. The government-in its infinite wisdom and generosity-set up a facility to match dealers with creditors. Strictly a middleman role, of course.

But had it not been for the credit crisis and the difficulty auto dealers are having buying cars on credit to stock the lots, we probably wouldn’t be looking at the possibility of resignations in Parliament today. But the more resignations the better, we say!

Meanwhile, in the housing market, the government is seeking new ways to keep the bubble from deflating. “Stamp duty on housing loans is set to be abolished after the Henry tax review, which is likely to recommend states be given a share of income tax to make up the difference,” reports today’s Australian.

Stamp duty is a cash cow for the States. And boy do they need the cash. The trouble-as they seem to be grokking now-is that if the housing market stops booming, a vital source of State revenue disappears just when the States are facing increasing liabilities AND borrowing costs. According to the Australian, “One of the world’s leading experts on federal taxes, Canada’s Richard Bird, said the states were heading for a financial crisis because they did not have a sufficient tax base to support their burgeoning health and education costs, which were all rising much faster than the consumer price index.”

This is the nexus of the demographic and credit crises. As populations age and get larger, the cost of generously promised government benefits goes up. If the government cuts one tax you can be sure it’s going to raise another. But you wonder if it’s ever occurred to anyone that it’s not a question of getting the right mix of taxes and excise, it’s a question of reducing unrealistic promises the government can’t keep without going deeply into debt or crushing economic growth with higher taxes.

Finally, a third party weighs in on Australia’s banking sector. Dow Jones newswires reported last week that, “Veteran banking analyst Brian Johnson has warned of more bloodletting in Australia’s banking sector. He recommends investors go underweight in banking stocks as loan defaults begin to climb.”

“Mr. Johnson, an analyst at CLSA, says that for the first time in 17 years, Australia is facing a loan loss cycle, where growth in bad debts outpaces growth in lending. In a markedly bearish 200-page report, Mr. Johnson has slapped price targets on the four major banks that are dramatically lower than their current trading levels. ‘Having largely avoided the pitfalls associated with securitization assets that have plagued global institutions, Australian banks are now facing their first loan-loss cycle since 1992,’ said Mr. Johnson.”

There’s nothing new in the analysis. There are still heaps of bad loans in commercial and residential real estate around the globe. Those loans don’t improve if people feel more confident about them. It’s an asset value problem. And it’s a debt problem. The debt households and businesses used to build up their assets now has to be wound down.

So let’s see…it’s still a balance sheet recession…politicians are still liars…you still can’t get something for nothing…and investors looking for bargains now should look at hated assets that are on the right side of long-term trends. Until tomorrow…

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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26 Comments on "Stamp Duty Dilemma for Aussie States"

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Coffee Addict
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Re Farm Investments: I observed many so called “Pitt Street farmers” when I was a child. The successful ones were always AT the farm when we visited (I usually eavesdropped on the veterinary // genetic // production advice being provided). I knew they were successful because they drove things like V12 Daimler Sovereigns and S Class Mercs . Coming down a peg, other successful farmers I have met just love their work and love to learn. I recall one pig farmer like this who previously flew an ME109 on the Eastern Front. Perhaps he applied the same discipline (and manouverability)… Read more »
Pete
Guest
CA: With you on the banks…you’d do well to convince me to buy a single share in the next few years. As for stamp duty…of course this is a big deal for the states. Rising real estate prices = higher stamp duty. In some states, they didn’t bother to change the thresholds for FHB stamp duty, even when the cheapest houses threatened to go above the FHB stamp duty threshold. And that was obviously because they were enjoying the money. Now my personal theory was that with all Labor state Gov’s and a Liberal Gov before last election, the state… Read more »
Ross
Guest
CA, that German tradition is born of the fact that Germans take everything technical seriously! The weekend garden is also as much a traditional thing as lederhosen and gluhwein and they sometimes combine the 3 even now, you see little family inherited garden plots alongside German railway tracks near most urban centres and when German professionals get a little money they get an adrenaline rush whereby most commercial fields close to cities just beyond the horse riding clubs etc are pitt st types. I also knew a WWII fighter pilot who had the dubious honor of being a decorated interceptor… Read more »
TheGoat
Guest
Farming sure has changed over the years, gone are my fathers days where you grew grain delivered it to the silo and the SMA (grain marketing boards) paid you what they wanted in installments over the following 12 months (this was the system until export deregulation in the mid 90’s). Now days to be a successful producer you have to be not only Ag savvy but also market savvy. In my area a number of us use futures, options and local forward contracts to lock in prices for inputs, currency and produce. Like most businesses though its all about critical… Read more »
Ross
Guest

TheGoat, subsoil & sowing window looks good this week in mid west NSW for my connections on family farms. Like you they have been delayed by rain for spraying so much that we were nearly at the point of going back to leavinf it waiting to see what popped up.

Isaac H
Guest

Stamp Duty really is an absurd tax, which stops alot of things from functioning,and land tax is even more absurd…………but Local councils would have to be the absolute most absurd………most large councils are “bloated with fat, and the only service they provide is “safe Jobs” for those within………at the expense of the jobless ratepayer, or lets say soon to be jobless……..

It does not matter who gets elected to these large councils, they never get better, and just create an economy for themselves.

Fat local and state goverments employees are feeding themselves from the rest of us, and produce zero.

TheGoat
Guest
Hi Ross, well its raining (showers) in my area again today. My crops have been in since May. I wish we could get a few dry days to knock over some weedy patches. After saying that I’m very reluctant to complain about the rain. Production risk is still the one risk that producers like me can never really fully hedge against. This business isn’t for the faint hearted or those without deep pockets but I suppose when you actually produce something based on the weather it never is. Personally I wouldn’t swap it for the city, I spent my high… Read more »
Ross
Guest
@TheGoat I have been able to help out sowing and stripping this past 3 years and my luck has been in even if yields have been disappointing. This year we have a couple of issues but if they are syuck this next week I will get up to help out so we cvan interchange between the tractor and ginning around. We bring in an agronomist. So I here you on lifestyle. There is a little vein of connection that needs rubbing and it isn’t to do with the dollar. We have other remote family with a bigger show over Condo… Read more »
TheGoat
Guest
Ross I hardly ever sell my actual physical production forward all that does is increase your production risk like your family member found out. Before I go on I better point out that I used to be a grain trader for one of the grain marketing boards, so I suppose I have a bit more of an insiders view of trading compared to most producers. I dont often use futures themselves to hedge, I’m a options person. Options PUT – CALLS give the holder the RIGHT but NOT the obligation to exercise the option (either buy or sell). Meaning if… Read more »
Ross
Guest
TheGoat, I agree in part but it works the same at the bottom line in the markets. 5% has been ++ in my reckoning and must be financed and adding your input costs and looking at cashflow and the outcomes in a bad year … but welcome to farming you will rightly say. One of the most interesting discussion on this shows up within CTX, a different business completely but they don’t hedge their oil price inputs, oil in transit, or their currency because their modelling says over time the net doesn’t work. They did get walloped in 08. My… Read more »
Richo
Guest

Oh well, the federal government will get plenty of extra money from other taxes when double digit inflation bites.

CGT is not calculated on real gains but nominal.
If an asset, say a bar of gold or a land investment stays at the same real value. But high inflation doubles it’s price in 5 years, the poor owner will be liable for 50% of that notional increase as CGT.

Even money in the bank earning negative real interest will generate significant tax (at the marginal income rate).

And income tax rates will bite hard as inflation triggers rapid bracket-creep.

Biker Pete
Guest

So why (ever) sell, Richo? Live on the dividends, or the rents. The more I read, the more I’m convinced that a bull with “…a herd of cash cows…*” is a very contented bull… no BS! :)
* Boholt

Coffee Addict
Guest

If 20%+ inflation is on the cards, Richo’s point about CGT will be crucial to how the markets will operate. Many investors will hold out for dividends as Biker Pete says and SMSF frameworks will be more attractive (indeed the only option) for many traders. Dividend vs. reinvestment policies of companies will also be affected by the tax on infation distortions.

Richo
Guest

It will be interesting times.

My point about tax on interest will also impact investment decisions, because it applies to dividends. Dividends could become negative in real terms and still attract a hefty tax slug.

If everyone piles into SMSF and the govt removes some of the tax breaks on super, they will be trapped there.

I was a child in the 70’s so sisn’t experienced the financial pain of those times but I imagine there will be some parallels – large scale wealth destruction and high taxes by Governments struggling to avoid defaults. Maybe sky high oil prices too. Yippee.

Ned S
Guest
That is the theory Biker – Accumulate assets that earn income. And where the income will adjust with inflation – So cash is no good. And gold is worse – Unless one is trading it. And if the income adjusts down should deflation happen, who cares – Providing the income remains enough to live on. And don’t sell the assets. That way you avoid paying CGT. It is one of the reasons I like/d(?) property as an asset class. It is not a guarantee of course. But my take on Australian history is that the liklihood of a mortgage free… Read more »
Ned S
Guest

CA: Keep an eye on the Ken Henry tax review I think – Waving goodbye to franked dividends for Aussies is a likely tradeoff for bringing more foreign investment money into the country. Plus it is quite possible the corporate tax rate will be lowered. Given that my addictions run to stronger substances than coffee, I’m not clever enough to figure out how that might affect which stocks when. But if you are a trader, I suspect it could all be quite tradeable? I’m half tempted to bear it in mind myself.

Biker Pete
Guest
Must be a much bigger tiddler than I thought, Ned! :) Your note: “…. when one starts factoring in roof refurbs and exterior paint and replacement kitchens and bathrooms and hot water systems and stoves and floor coverings and light fittings and driveways and paths and gutters and downpipes and turf and tree trims and door handles and locks and … ” It’s pretty much taken care of with 40-year depreciation schedules. Our tax refund alone is enough to live on, due to these. I guess it is a pretty big ask… but thirty years of buying low and selling… Read more »
Ned S
Guest
Yes Biker, it surely sounds like you’ve been considerably more dedicated and consistent regarding putting your financial house in order than a lot. A bloke said to me once that you needed 6 houses to retire in Oz – One to live in and five to earn rent. I think that’s still a pretty reasonable assessment. I take your point about the 40 year depreciation schedule on new houses. I can see it being real handy for the first 15 years or so but suspect it would lose a bit of its gloss with inflation? The other big killer with… Read more »
Greg Atkinson
Guest

I have had the primary sector on my investment radar for a while. There are a lot of middle class mouths to feed in Asia and as they become wealthier they want more than rice, fish and vegetables. Australia seems pretty well placed to meet this demand.

Ross
Guest

Greg, not so much on the food side but NAM is worth a squiz, turnover is small and it is a coop so patient accumulation is the way to go. Management & board have steered well thru their market & drought issues.

Greg Atkinson
Guest

Thanks Ross. I just worry about anything to do with cotton, from what I remember cotton is a pretty water thirsty crop and I read a while back that it should have never probably been grown in lot of areas it is now. But I am actually a city boy and know zilch about cotton farming. Any thoughts?

TheGoat
Guest
As the middle class in Asia grows they consume more meat. Diets have changed dramatically in the last 30 years. In 1985 the average Chinese consumer ate 22Kgs of meat per year. Today, it’s more than doubled to 55Kgs. That in of itself is impressive, but when you consider that it takes 17Kgs of grain to generate one Kg of beef, you begin to see how grain demand can rise exponentially to population growth with even modest changes to diet, especially meat. Grain production not only feeds us but also the animals we eat who are produced in feedlots. Since… Read more »
Biker Pete
Guest
Utterly agree, Ned. We signed a new building contract on Monday… and I counselled the missus (dangerous gambit, that!) that we should wait and see what the Ken Henry Report contained before the next one. For once she was stumped (that’s rare) but had misheard me. Thought I was talking about England’s Stuart dynasty. No, KEN, not King, I yelled, before she laid about my ears with her ladle. Then, later in the day, a tiler, seeing me digging water tank overflow trenches asked me “Is it the right time to build?” Basically, I responded as _you_ would: “Wait and… Read more »
Ross
Guest
Greg, you probably shouldn’t head into the sector unless you get comfortable around the detail. There is cotton and cotton seed. There should be a semi rebound next year in irrigated production and there are dry crops being worked in trial areas that may have some potential further on. We won’t go back to the boom years production wise but on the ginning and marketing side there has been consolidation and Australia has kept its niche customer base especially in Indonesia. NAM has been navigating all the challenges pretty well for mine and they surprised the market on the upside… Read more »
Greg Atkinson
Guest

Thanks Ross. I will keep having a look at NAM as it does look interesting.

Ned S
Guest
The stamp duty storey is interesting. Bird also apparently said that “In Australia, it should certainly be feasible to permit states to impose a surcharge on the federal personal income tax base”. Although other parties suggest different ways to make up the revenue shortfall that would result from doing away with stamp duty – Increase land tax; Increase council rates. It seems that the argument being put up for public consumption in favour of the change is that stamp duty is seen as contributing to market inefficiencies – It discourages people from selling up and moving to better paid jobs… Read more »
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