Finance and banking Archives - thegoodwills.com

Keeping track of company directors

insolvency-phoenix-companies — Image: Locked gates, Jody Davis www.pixabay.com

It’s been nine years since someone suggested a way to stop company directors from avoiding creditors by creating a ‘Phoenix’ company.

‘Phoenixing’ describes the process when a new business arises from the ashes of a liquidated company. It’s a loophole that allows unscrupulous people to leave their debts behind with the liquidated company and start afresh (leaving creditors out in the cold).

The total cost of Phoenixing to the Australian economy is estimated to be between $2.9 billion and $5.1 billion annually, according to the Australian Taxation Office (ATO). It is typically done by transferring assets to the new entity (leaving liabilities with the old company). ‘Dummy’ directors are used to set up the new company. Dummy directors play no actual role in the company. Liquidators and investigators have uncovered instances of people who had no idea they were a director of their spouse’s company. They have also found homeless people, distant relatives, fictitious names and variations on real names. (Donald Duck is apparently a director of several companies. Ed.)

The Phoenix Project, an academic investigation, has long been investigating this tactic and how people get away with it.

The project was initially set up by Professor Helen Anderson, then of the University of Melbourne, in collaboration with Monash University. She first suggested using a 12-point identity check in 2013 and it was one of the key recommendations in the 2017 Phoenix Project report.

The first problem for corporate enforcers is that setting up a new company while the other is in liquidation is technically legal. There have been many instances when a new company legitimately arises from the wreckage of an insolvent one (company restructures, buyouts, rescues etc).

These arrangements are usually supervised and strive to ensure creditors and employees are paid what they are owed.

The illegal Phoenix company, however, ignores creditors and allows the principals to continue in business unchallenged.

I’m sure we’ve all read about the more egregious examples. They usually happen in the construction industry. Subcontractors and tradies turn up to the building site as usual, only to find the gates locked and the ‘boss’ nowhere to be found. While liquidators take over the business, these unsecured creditors take their place at the end of the queue. Meanwhile, the principals have a new banner at a site elsewhere in town. This gives the media plenty to rant about, but it solves nothing.

Writing in The Conversation in 2016, Prof Anderson said the aim of illegal phoenix activity was to defraud taxation authorities, trade creditors and employees. She said the practice is widespread in Australia, with a Productivity Commission report in 2015 finding there were between 2,000 to 6,000 phoenix companies operating here. A Senate Economics References Committee inquiring into the Australian construction industry found illegal phoenix activity was a problem “throughout the economy”. The committee suggested it was “a significant culture of disregard for the law”.

The long-running exercise to stop this happening is being driven by the Australian Taxation Office, which is at the top of the creditor queue. In a new regime, the ATO is bringing 30 different business registries under the one entity, Australian Business Registry Services.

ABRS deputy registrar Karen Foat said this would allow regulators and advisors to obtain a more complete picture of a director’s corporate history. Ms Foat said it would also help authorities crack down on illegal phoenix firms.

“These are companies that time and time again wind up their firms leaving employees without salary, entitlements and superannuation, as well as leaving contractors, other businesses and government in the lurch,” she wrote in an Australian Financial Review feature.

Ah…so you didn’t know? The deadline is November 30 and if you don’t apply in time you are liable to a fine of up to $13,000.

There are 2.5 million company directors in Australia, with more than 1 million of them yet to apply for their unique, 15-digit Director ID number (DIN). An ABC item updated this week reported that more than 1.5 million directors had applied for (and had been issued with) a DIN since it was introduced in April last year. This leaves about one million directors who have just five days to apply.

A DIN is a unique identifier given to a director who has verified their identity with the ATO. It is much like the 12-point identity check we all endure to open a bank account.

Until this process began in 2021, company directors could be signed up without much in the way of verification.

She Who is Also a Director signed up for a DIN, as did I. It was a bit of a palaver as you had to use the Federal Government’s myGovID mobile phone app. I already had an account but had to go through several stringent steps to prove my identity. #wehatetechnology

Those who need to apply include company directors, corporate trustees (of an SMSF) and directors of charities and not-for-profit organisations. In short, anything registered under the Corporations Act, including directors of foreign companies registered with ASIC and carrying on business in Australia (no matter where they live).

The ATO acknowledges that the vast majority of company directors behave with ‘extreme probity’, which is consistent with the trust the Australian community places in them.

Yes indeed, we acted with said extreme probity when applying for our director ID last month. The one major problem with a 15-digit number is, how the hell do you remember it? Oh right. Log on to your ABRS account and voila. No hackers here.

We mentioned this topic briefly a few weeks back when investigating the flurry of data breaches and hacking going on within large organisations. Ironically, ASIC warned company directors last month that email and text scammers were posing as the ABRS. As always, do not click on links or divulge your personal details in these instances. It’s not called ‘phishing’ for nothing.

Prof Anderson, who has since retired from the University of Melbourne’s School of Law, said the issuing of a DIN would enable tracking of directors who have been involved in multiple failed companies. It would also reveal fictitious directors, the bane of credit rating agencies and the ATO.

“Requiring would-be directors to quote their DIN on applications to incorporate companies would let ASIC build a valuable database of directors’ corporate histories, helping it to identify repeat offenders and candidates for disqualification from managing corporations.”

I’ll admit this week’s FOMM is a little arcane, reporting on a topic you only ever read about in law and accountancy journals.

But we all ought to be concerned about rorts that potentially cheat the country of up to $5.1 billion a year. Almost everyone would know of a subbie or tradie who got burnt in circumstances just as outlined here.

I’m sure you will agree that everything would work better if we all acted with ‘extreme probity’.

I initially misread this as ‘extreme Proby’ which says a bit about my youthful musical obsessions. Probity means ‘complete and confirmed integrity, uprightness and honesty’. Proby (with a PJ) means a deep voiced pop singer whose best-known hits were songs from West Side Story.

Leaving you with an offering from DJ Probity.

Hoarding cash in a cashless society

hoarding-cash-cashless — Image by S. Hermann and F. Richter, Pixabay.com

Australians have been hoarding cash, particularly through the first year of Covid-19, despite forecasts that we will be a 98% cashless society by 2024. Even if this prediction from global payments giant FIS comes to pass, some 540,000 Australians will still prefer to use cash.

You may recall a flurry of news stories on this topic in March. The research commented on the effect of a de facto ban on cash during the first year of Covid-19. Even now, merchants are discouraging the use of cash at point of sale.

The topic was prompted when Professor Steve Worthington of Swinburne University’s business school sent me an article he prepared for the ANZ Bank publication, Blue Notes. The topic was ‘Can cash survive the digital tide?’

Prof Worthington says the key issue with the domination of electronic transactions is that it excludes people who either rely on cash or prefer to use it. He argues that physical cash should be classified as an essential service (designated as a Public Good).

It may not surprise to learn that Australia’s high cash users are likely to be older people, have lower household incomes, live in regional areas and are less likely to have access to the Internet.

As you’d know, banks offer their customers internet banking, but you need a secure internet link to do so.

The Australian Bureau of Statistics (ABS) estimates that two million Australians do not have access to the Internet. Many Australians use public internet, most commonly at public libraries – not the most secure method of conducting Internet banking.

Prof Worthington notes that there is now more cash in Australia than ever before, with record growth in 2020. But it is not showing up in the Reserve Bank of Australia’s statistics as being circulated.

A cash payments study by the RBA in June last year confirmed that Australian consumers were continuing to switch to electronic payment methods in preference to cash. The share of in-person cash payments was still substantial; at 32% by number and 19% by value in 2019, down from 43% and 30% respectively in 2016. But generally, we have taken to tapping and going.

Meanwhile, the RBA is mystified by the rising demand for cash, which does not show up in circulation data. Cash (notes issued in excess of those returned), soared 17% during 2020. The average in the decade prior was 5% a year. The Reserve Bank went to its contingency fund twice during 2020, such was the demand for $50 and $100 notes. There are now 36 $50 notes and 16 $100 notes in circulation for every person in the country.

(“Where are mine?” – She Who Keeps Coins in a Tin for Christmas).

Tabloid newspapers and current affairs programmes go to the ‘stashed under the mattress’ cliche when reporting on this curious social trend. Given the meagre returns available on term deposits and the comparatively low cost of domestic safes, it is fair to assume some people have a stash of cash at home.

There could be many reasons for this apart from convenience; like hiding one’s income from the tax office, Centrelink or the ex.

I’m from the pounds shillings and pence era when shops would not cash a cheque unless they had previously done business with the person presenting it. Cash was definitely King then.

My Dad used to call hard currency ‘filthy lucre’ and while he took cash over the counter in the bakery shop, he always washed his hands before handling food. The term ‘filthy lucre’ does not mean that banknotes are dirty – it’s a biblical reference to ill-gotten gains. But I digress.

Australians have gravitated big time to electronic banking solutions. The biggest clue is the absence of queues at ATM machines and mass withdrawal of ATMs in city suburbs – 2,500 gone in 2020 alone.

Forecasts that Australia would be a virtual cashless society by 2024 were drawn from a new report by financial giant FIS Global. Mike Kresse, head of global payments at FIS, believes cash will be virtually retired by 2030.

“From individual consumers and small businesses to the largest clients, cash can’t compete with rising expectations for fast, safe and easy payments,” he said when launching FIS Global’s annual report.

“The smartphone was already transforming payments, and the pandemic brought the future faster, accelerating the trends.”

FIS forecast that by 2024, Australia will be the fourth most cash-averse economy in the world after Sweden, Denmark and Hong Kong.

Prof Worthington says Australian authorities need to work on establishing a way to include people who still want to use cash, hence his plea to consider cash as an essential service.

“We are using less cash as a payment system, but today people still need access to cash. That may be because of a desire for privacy, convenience or as a backup payment option when all else fails.”

Cash is still the preferred payment option of many small traders and sub contractors. The Australian Taxation Office (ATO ) occasionally has a blitz on companies thought to be under-reporting income, one year targeting 45,000 small businesses.

“We use a range of tools to identify and take action against people and businesses that may not be correctly meeting their obligations,” the ATO says.

“Through data matching, we can identify businesses that don’t have electronic payment facilities.

“These businesses often advertise as ‘cash only’ or mainly deal in cash transactions. When businesses do this, they are more likely to make mistakes or don’t keep thorough records.”

It’s comforting to know that the ATO differentiates between the cash economy, the ‘shadow’ economy and the ‘black’ economy, the latter run by organised crime groups dealing in drugs, prostitution and people smuggling.

This topic got me thinking about the day in 1984 when I was locked in a secure room with a million dollars. Our chief of staff had been asked to send a reporter and photographer to a bank branch in Toowoomba. The occasion was the arrival of Australia’s first $100 note – in this instance 10,000 notes delivered in a square block. The cash was transported by train from the Reserve Bank mint at Craigieburn in Victoria. Secrecy was paramount and we were not told when the photo opportunity would happen until half an hour prior.

I have to tell you, a million dollars in $100 notes takes up a lot of space in a room. Our photographer fitted a wide angle lens to best capture the great block of notes and obligatory men in suits.

These days, I almost always carry cash in my wallet and feel naked if I run out. Despite having a debit card and a credit card, it somehow just isn’t the same. Even during Covid in 2020, when retailers looked askance at people tendering banknotes, I slipped the odd five or ten across the counter. Cash will always be an attractive option for some people because (a) it is anonymous and (b) does not leave an electronic trail.

After all, until the day when marijuana is decriminalised, regular users will turn up at the usual location with $300 or so in cash. There are many such occasions when consumers are unlikely to use buy now-pay later options.

No sooner had I written that, an ad for Safepay popped up on my screen! How do they do that?

How deep is the financial hardship well?

financial-hardship-savings — How many weeks your savings will last without income – graph provided by The Grattan Institute

It is probably no comfort to anyone to reflect on the year when investors could get 14.95% on a bank term deposit. It was January 1991, the recession Paul Keating said we had to have. People with personal loans and credit card debt watched horrified as repayment rates went to 20% and beyond. The average variable mortgage rate rose to 17.5% at the same time. The gap between the haves and have-nots in that era was painfully obvious.

In the early 1990s, financial hardship forced many younger Australians, unable to service their mortgage repayments, to walk out of their mortgaged houses, leaving the house keys on the bank’s counter. Meanwhile, the lucky worker/investor with a lazy $100k to invest could earn $14, 950 in interest (the price of a new car), over 12 months with no risk whatsoever. Except, of course, if the deposit was with one of the eight financial institutions that went broke in that era.

In 2020, the COVCID-19 pandemic has certainly made it clear how many Australians are suffering financial hardship. At one end of the scale, you have self-funded retirees, on the pig’s back, really, but struggling with the collapse in the value of shares and difficulties finding safe places to store their cash for a return of more than 1.75%.

At the other end of the generational spectrum, while the official unemployment figure is an improbably low 6.2%, it does not reflect the one million casuals who not only lost their jobs, but did not qualify for the Federal Government’s safety net, Jobkeeper.

COVID-19 struck at a time when the Australian household savings rate had dropped to 3.6% (20% is the ideal), and is forecast to drop to 2% or lower in 2021-22. The rate is calculated as a percentage of the amount saved from disposable income.

Meanwhile household debt – most of it linked to mortgages – is at a high of 119.60% of GDP. Economist Gerard Minack told the 7.30 Report in November that household debt at 200% of household income was a “massive macro risk”.

Then came COVID-19 and an economic shutdown the likes of which the country has not seen since the 1930s.

I’m running these confronting numbers past you because there is a lot of nonsense written about Poor Pensioners vs Irresponsible Millenials. Also, some commentators, particularly in the housing sector, are ‘talking it up’ at a time when worst-case scenarios predict a 30% drop in prices.

Conversely, stock market analysts are talking the market down, even as it keeps (slowly) recovering. You have to wonder why.

In mid-April the share market was officially proclaimed a “bull market’’ by the Australian Financial Review (AFR), because share prices had jumped 20% since mid-March.

What’s amazing is that the market has rallied at the same time that Australian superannuation funds paid $9.4 billion in financial hardship paymentsto approximately 1.17 million fund members. Australian super funds have a large exposure to equities, so they have managed the payments so far by selling investments, including shares and holdings in managed funds.

They also asked for help. As the AFR’s exceptionally well-informed Chanticleer observed, The Australian Superannuation Fund Association (ASFA) put a proposal to Treasurer Josh Frydenberg to allow the Australian Taxation Office to cover the hardship withdrawal payments. The plan was super funds would repay the payments over a period of time. The industry also called on the Reserve bank of Australia to provide a liquidity buffer. None of this happened, but Australian funds are expecting a continuation of the rush to withdraw hardship payments.

Under the COVID-19 measures, individuals whose income has been affected can withdraw up to $10,000 of their superannuation balances prior to June 30. They can, if necessary, apply for a further $10,000 after June 30.

There are ordinarily a few hoops to jump through to apply for an early-release hardship payment. As we know, superannuation is meant to be locked away until you retire or reach an age when you can officially tap the fund for money. But in these dire times, super funds worked with the Australian Tax office and other government departments to expedite hardship payments.

By close of business on May 7, ASFA made around 1,175,000 individual payments, totalling around $9.4 billion in temporary financial support. ASFA estimated that 98% of applications were paid within five working days.

Applying for a super hardship payment is a risky business if you are under 35. According to AMP, the average super balance for people aged 25-29 is $23,371 for men and $19,107 for women. In the age group 30-34, the average balance for men is $43,583 and for women $33,748. So it does not take too many trips to the hardship well to run out of cash. I used those age groups deliberately, as most pollsters agree that so-called Millennials are people now aged between 22 and38.

But it is not just the young that have little in the way of savings. According to the Grattan Institute, 50% of working households have less than $7,000 in savings. This probably explains the rush of super fund hardship applications. The Institute admits the data is a few years old, but says the scenario is unlikely to have changed much.

“As you might expect, working households on lower incomes tend to have less in the bank. Among working households in the bottom fifth of household income, the median total bank account balance is just $1,350.

“The meagre savings of many low-income workers are a big worry because they are most likely to be employed as casuals and therefore not have paid sick leave or annual leave.”

The Grattan Institute makes the point that as the lockdown drags on, more people will start to run out of ready cash.

“Our analysis shows that half of working households have five to six weeks’ income or less in the bank. The bottom 40% of working households has about three weeks’ income or less in the bank. A quarter of all working households have less than one week’s income in the bank.”

This last figure may bring your head up, if you remember news stories from New York, which we found shocking, of people with less than $400 in the bank.

Sometimes I think about these matters when doing the weekly grocery shopping, where retail prices are clearly outpacing inflation. (Ed: We did score a large pumpkin from a roadside stall for $3, so you can get lucky).

Those with a job who have not had a pay increase in years can justifiably feel cheated. Admittedly, the Federal Government came to the National Cabinet table with an extraordinary rescue package. But while one of these measures temporarily doubled the unemployment payment overnight, it now seems to be flawed piece of legislation.

People may rightly point out that employers are obliged to pass on the Jobkeeper payment of $1,500 a fortnight, regardless of what the employee was being paid previously. At some stage, these payments will stop and we will revert to the status quo. Will recipients who were technically overpaid have to repay some of this money, or does it just go to the deficit?

Robodebt II, coming soon to a cinema near you.

FOMM backpages:

Taking An Interest In Recessionary Economics

interest-rates-inflation-consumtion — Australia’s savings rate, spending and disposable income on a downward trend

The end of financial year meeting of the Basil and Sybil Cheeseparer Superannuation Fund was going well until the Trustees (a) found that their investment strategy was out of sync with reality and (b) failed to find a fixed interest investment that would return more than 2.50% over five years.

“We should stick it under the mattress,” said Sybil.

“Your side or mine?” quipped Basil.

As you should know, even if economics is not your forte, the Reserve Bank of Australia this week cut official rates for the second month in a row to a new low of 1.0%. They could have heeded this warning from Sydney’s University of Technology Professor Warren Hogan, but the RBA is not often swayed by commentary.

The RBA continues to be driven by persistently low inflation (1.3% in the March 2019 quarter). The theory is that if the RBA cuts rates low enough, business and consumer confidence will return and inflation will resume its normal trajectory (2% to 3%). This in itself should build a case to raise interest rates, albeit gradually.

This current cycle of record low economic growth, inflation and interest rates is best explained by the graph ‘household consumption’.

It clearly shows consumption/spending falling off, concurrent with a decline in disposable income. Note the 10-year decline in our savings habit. Not much point saving if you are only going to get 2% or less in a bank and then pay a fee for the privilege, eh? (a nod to Canada Day).

An official interest rate of 0.1% is not as dire as that of Japan, Switzerland, Sweden or Denmark which have negative interest rates. Actually, since the onset of the Global Financial Crisis in 2007, many countries drastically cut interest rates in an attempt to stimulate growth (production and jobs). A blog by the International Monetary Fund (IMF) reasoned that while, the global economy has been recovering, and future downturns are inevitable:

“Severe recessions have historically required 3–6 percentage points cut in policy rates,” authors Ruchir Agarwal and Signe Krogstrup observe.

“If another crisis happens, few countries would have that kind of room for monetary policy to respond.”

IMF staffers periodically write blogs where they test models and theories (the IMF disclaimer says they do not represent the IMF’s views).

In this context, Agarawai and Krogstrup construct an argument for countries to survive financial crises by using negative interest.

The authors posit that, in a cashless world, there would be no lower bound on interest rates.

“A central bank could reduce the policy rate from, say, 2% to minus 4% to counter a severe recession. The interest rate cut would transmit to bank deposits, loans, and bonds.”

“Depositors would have to pay the negative interest rate to keep their money with the bank, making consumption and investment more attractive. This would jolt lending, boost demand, and stimulate the economy.”

Yes, but how do retirees like Basil and Sybil, who have surplus cash to invest, fit into this system? When the B&S Cheeseparer Superannuation Fund was formed, the cash rate was still climbing to its peak of 7.25% in 2009. That made it possible to invest cash in term deposits paying 5% or more, an attractive option for older people who wanted a safe haven.

Now, the return for risk-averse investors barely covers the cost of self-managed super fund administration. And to think that Labor were talking about taking away much-needed dividend credit refunds! (The fact that this would only affect a small number of wealthy individuals was a fact not well explained by Labor and gleefully misinterpreted by the government).

Continuing low inflation is the main reason Australia’s central bank keeps cutting interest rates. Inflation dropped to 1.3% in March – the cost of living as represented by the Consumer Price Index (CPI) minus ‘volatile items’ like home purchase costs. However, Commonwealth Bank senior economist Gareth Aird argues that adding housing costs could add 0.55 percentage points to the CPI, giving the RBA less reason to lower interest rates.

Warren Hogan writes that ‘Australia is in a new environment where tinkering with interest rates may not be as relevant as it once was.’ Inflation is subdued around the world, he notes, yet the global economy is growing and unemployment is low.

Likewise in Australia, unemployment is low, although wages growth has stalled. As Hogan says, it isn’t at all clear that even lower interest rates would have a meaningful effect on inflation.

Australia has not plunged into a recession for 28 years, yet some commentators have used the R word when talking about the latest round of retail closures. (I should point out that uttering the R word is regarded in some circles as akin to walking under a ladder, breaking a mirror, toppling a salt shaker or seeing a priest in the street).

Retail closures included Maggie, T, Roger David, The Gap, Esprit and Laura Ashley. National retailers planning to downsize include Big W, Target, Myer and David Jones.

While some retail closures involved inevitable job losses, there will be more jobs to go as the big national chains roll out their smaller formats.

For the benefit of those aged under 28, an ‘R’ sets in after two consecutive quarters of negative GDP growth.

As we can see, the GDP result over nine months (+0.3%, +0.4% and +0.4%), means we are in dangerous territory.

The Gross Domestic Product (GDP) number is the one that measures whether the economy is growing or retracting. Safe to say at this point that a 0.4% increase in the March 2019 quarter (published this week) is not what the market or the government was looking for. The annualised GDP is 1.8% − the lowest since the GFC. Some pundits are calling it a GDP-per-capita-R, that is, population growth is overtaking economic growth.

The low interest rate scenario (and the data implies more cuts to come), is good for young people buying houses, but has a detrimental impact on retirees. Most people in retirement mode take a conservative view, preserving their remaining capital as long as possible. Bucket-list advocates would say what the hell and head off to Antarctica while there are still icebergs, glaciers and penguins.

Retirees typically have 60% to 70% of their super fund/savings in fixed interest products, with the balance in income-producing shares. But when faced with returns of 2.45% and less, it is difficult to stick to this formula. Shares or investment housing offer riskier but more attractive returns, though not as risky as spending all your cash on travel adventures or stashing it under her side of the mattress.

What to do? I have no answers, nor, I suspect, does the central bank, or the government, which is seemingly obsessed with the notion of stimulating the economy via $158 billion in tax cuts over 10 years.

Everyone under 30 needs to be across this subject because, as Herbert Hoover once said: “Blessed are the young, for they will inherit the national debt.”

We’ll leave you with some insights from Clarke & Dawe about banks, the debt crisis and interest.

PS- I’m offering a choice of home-made, gluten free cake to whomever can explain to me why inflation is a ‘good thing’ – Ed..

The Eighties and the Sail of the Century

sail-eighties-century — Australia II entering Fremantle Harbour 2001 Image copyright WA Museum

If one symbol conjures up an image of Australia as world-beaters, it is our one-off snatching of the Americas Cup yacht race trophy in the Eighties.

Those of you old enough to remember will see in the cloud archive of your distant memory (and maybe want to press delete), former PM Bob Hawke wearing a garish black and white sports coat and declaring: “Any employer who sacks a worker for not coming in today is a bum!”

He was, of course, referring to the famous weekend in 1983 when the Americas Cup was won by Australia II, a yacht owned by entrepreneur Alan Bond’s syndicate.

The Jungian theory of synchronicity came into play when at least four different newspapers (with different owners), led with a page one headline “Sail of the Century”. It was a no-brainer for pun-happy sub editors, inspired by popular Australian TV quiz show, Sale of the Century.

The Eighties were dizzy days for Australia, five years before the Bicentenary, still searching for an identity and finding it in the braggadocio of sporting achievements. That Alan Bond went on to become the country’s most talked-about entrepreneur and subsequently fell from grace owing banks and shareholders hundreds of millions is sort of by the by. We still won the Americas Cup and Bond was still a hero, the capitalist version of Ned Kelly, if I dare.

Historian and author Frank Bongiorno covers this episode and many more in a densely researched book, The Eighties – The decade that transformed Australia. This book was a 70^th birthday gift from songwriter friend Fred Smith, himself something of a historian. Perhaps he knew that I was a fledgling business reporter in the 1980s and that this text would keep me up at night. It did.

Bongiorno recalls how Alan Bond betrayed his humble background (a sign-writer with limited education). America was ahead of Australia 3-1 in the yachting series so reporters asked Bond what he thought. He declared, “We’ll win, just as we did in Gallipoli.”

I was working for the battler’s tabloid, The Daily Sun, in the 1980s, arriving there as the bountiful eighties started to crumble ahead of the October 1987 share market crash.

I’d been an all-rounder, completing whatever assignment came my way. Truthfully, I was looking for a way of avoiding ‘death knocks’ (visiting a home touched by tragedy to ask for a photo of the late family member).

And then the business editor went on leave and I was asked to ‘hold the fort’. The business editor never returned and so I held on for dear life to the trailing end of a very long learning curve.

I went on many a long lunch and used my secret weapon (I didn’t drink) so usually returned with a story or three. The 1980s was a time when the so-called ‘white shoe brigade’ held sway. These daring entrepreneurs cajoled banks, stockbrokers and investors into backing their wondrous schemes.

The likes of Bell Resources (Bond’s company), Adsteam (John Spalvins), Westmex (Russell Goward), Ariadne (Bruce Judge), Qintex (Christopher Skase) and Rothwells (Laurie Connell) went up like the rocket and down like the stick. A few lived on under different ownership structures, often going back to their core business (diversification often being the key to their downfall).

Bongiorno’s book suggests that, generally speaking, Australian business/finance journalists missed the boat when it came to exposing entrepreneurs for the charletans some of them turned out to be.

He used words like “suggestible”, “enthralled” or “mesmerised”, to describe the reaction of reporters given access to entrepreneurs like Bond, Russell Goward or Christopher Skase (himself a former finance journalist).

“The spectacular expansion of Qintex was built on Christopher Skase’s hard work, his bankers’ generosity and the public boosting offered by admiring business reporters, in awe of the rapid rise of one of their own,” he wrote.

Yet by October 1989, Qintex was being wound up, its debt to bankers ballooning to $1 billion (amid reports that Skase’s management company received more than $40 million in consultancy fees).

As Bain & Co economist Don Stammer said of those times: “the fact that the entrepreneurs’ castles were made of sand seemed to elude even the most experienced business journalist.”

The media agenda in the Eighties was to write aspirational stories about the corporate heroes re-shaping Australia. Then the share market crash of 1987 arrived and many of them headed for the exits. The publications who had talked these people up now had to find ways of tearing them down again. As always, the little people (the taxi driver who tips you about a little gold company that is going to strike it rich), got royally shafted.

At the peak of the share market frenzy in late September 1987, the All Ordinaries Index was running hot. Stockbrokers were prone to say things like ‘you could float a pea pod in this market’. Many small start-up companies went to the share market in this dizzy phase, raising capital to further their cherished dreams.

I recently sorted through old cuttings from the Eighties and found this gem about a small Queensland company looking to make artificial snow. It was quite exhilarating to follow up on the adventures of a 1980s entrepreneur/inventor, to find him still doing in 2019, what he first set out to do.

Alfio Bucceri was the inventor behind Permasnow (Australasia), a company which listed in late 1987 to raise $10 million. The goal at the time was to use the artificial snow technology in traditional ski resorts when real snow was in scarce supply.

Mr Bucceri’s dream was to develop indoor ski centres. After he sold his 33% shareholding in 1988, the company passed up the indoor ski centre opportunity and moved into other ventures such as hotels and retirement villages.

“From that point on (1988), I continued with my creative talents and created and patented new snow making machines and concepts, as well as branching into inventing toy and sporting products,” he told FOMM.

“These products include Snow4kids that now can be found on Kuta Beach in Bali, Australia and China.

“The childrens’ snow event concept is built around the new snow-making machines that I invented called the B4.

In January 2019, he exhibited the machines at the Beijing ISPO Ski Show. “They have been used for the past 10 years at Ski Resorts in China and South Korea as well as Sea World at the Gold Coast, where the snow machines make fresh snow for the Penguins every day.”

The concept of indoor ski centres that he pioneered prospered over the next 30 years, with indoor ski centres built in most parts of the world, including the Middle East and Europe.

“I was instrumental in bring indoor skiing to the Middle East in the early 1990s, when I partnered with MKM Holding’s Sheik Mana Bin Kalifha Al Maktoum to create the first Indoor Ski Centres there.”

Last year he was involved with a Permasnow installation at a new major casino project in Macau.

He does not regret his brief flirtation with the share market but found it easier going it alone.

“I have self-funded most of my projects since the 1980s. It is a longer but easier route to succeed without the restrictions placed on me during my younger days at Permasnow.”

And how ironic, given gossip just before the 1987 crash that Qintex planned to add Permasnow to its 170+ subsidiaries.

More reading:

The Eighties, Frank Bongiorno:

Ian Verrender’s explanation of why business journalists succumb to being part of the story they were supposed to be covering:

Don’t touch my dividends, Dude

dividends-franking-credits — Photo: “How will we afford dog food without the franking credits from our dividends?” pixabay.com, CC Mike Flynn

There have been few occasions when dividends made it on to the front pages or lead item TV news. The first time was when Treasurer Paul Keating introduced the dividend imputation scheme in 1987, largely as a way of eliminating the double-taxing of company dividends. From that day, Australian investors were given franking credits on the dividends they received on their shares. This had the welcome effect of boosting the investment return for the investor or super fund. It was just the sort of incentive needed to encourage Australians to prepare for their retirement and aim to become self-funded retirees.

Keating’s scheme did not, however, include the cash refund of the franking credit component of the dividend, which was introduced by John Howard and Peter Costello in 2001.

The second time dividend imputation was ‘trending’ was last week when Opposition Leader Bill Shorten said if Labor gets back into power he would scrap the current system. While emphasising Labor would keep dividend imputation, he said the plan was to scrap excess cash refunds on tax that was never paid in the first place,

The main targets are people with super fund balances of $1 million and more. There are plenty of those distributed among the large super fund managers but also around 30% of the self-managed fund sector are in that category.

In 2017, 1.12 million Australians were members of a self-managed super fund. There were almost 600,000 funds with assets totalling $696.7 billion. About 30% of SMSF assets are held in Australian shares, the ones that pay fully franked (tax-paid) dividends to investors.

What Mr Shorten’s plan appears to lack is a sliding scale which would exempt retirees whose fund balance is below a certain threshold or whose franking credit refunds are below the average ($5,000 a year).

A 2015 study which set out to debunk the myth that one needs a minimum $1 million to retire said that half of Australia’s workers approaching retirement have less than $100,000 in super. Three years hence, the proportionate numbers won’t have changed that much. The study by the Australian Institute of Superannuation Trustees (AIST) sets out to educate people that super is designed to work in tandem with the aged pension and that it’s OK to do that. Even a low super balance of $150,000 can nicely augment your pension.

Yet Bill Shorten says some funds are paying zero tax but picking up a $2.5 million refund cheque. At face value, that would seem to be a loophole worth closing. But at the other end of the scale are individual SMSF members with low fund balances who are undoubtedly already receiving a Centrelink part-pension. The shortfall caused by scrapping cash refunds on dividends will inevitably be recovered via a tweaking of government pension calculations on income and assets. Those who do not qualify for the pension will lose the lot.

Just how important a subject this is for retirees is shown in the Association of Superannuation Funds of Australia (ASFA) superannuation statistics: 1.427 million individuals received regular superannuation income in 2015-2016. Weekly payments averaged from $328 (term annuity), $496 (account-based) and $616 (defined benefit). Franking credit refunds on dividends from the ATO no doubt contributed to these payments.

Some industry super funds have come out in favour of Labor’s plan, but there is plenty of opposition, though so far there is no detail on which to base a counter argument.

ASFA says the proposal could have a significant impact on low-income retirees both inside and outside the superannuation system.

Chief executive Dr Martin Fahy said the system already has a $1.6 million cap in the retirement phase and reforms to superannuation and retirement funding are working but they need time to bed down.

“If there is a concern about individuals with large retirement savings receiving the benefit of refundable imputation credits then this would be better addressed by measures more closely linked to retirement balance,” he said.

Currently, the Australian Taxation Office demands that if SMSF Trustees draw a Simple Pension, it must be a minimum 5% of assets (rising through increments to 14% for those aged 95 and over (!). For example, a fund with two members under the age of 80 and a balance of $450,000 must pay its members a minimum of $25,000 p.a. Providing their other assessable assets and/or income is under the threshold, they can also receive a part pension from Centrelink which could bump their annual income to around $45,000, (somewhere between a modest living and a comfortable retirement). The upside (for the country) in this fiscal strategy is that earnings will (hopefully) keep the members’ balances in the black for as long as possible. This in itself eases the burden on the aged pension system.

And if you need extra cash for a car, a bucket list trip to the Antarctic or to pay a ransom to a hacker, you can take a lump sum. If you’re Homeland’s Carrie Matheson, track down the troll, beat him up and demand he unlock the computer. (He just threw that in for light relief, Ed).

Policy on the run

You will forgive me for liberally quoting other sources on this thorny subject. The ALP has not published a policy paper or issued a media release. The only thing you will find is on Mr Shorten’s website, tucked away under the category: ‘Bill’s Opinion Pieces’.

I initially found Bill’s piece on a website run by the authority on all things super, Trish Power. Power, starting from the same position as all, except for Fairfax Media, which ‘has seen’ a policy draft, suggests it has all the hallmarks of ‘policy on the run’.

Trish Power’s website is a good place to visit if you want to avoid the scaremongering stories in the tabloids and current affairs TV. I bought a copy of her book “DIY Super for Dummies” and found it invaluable when starting our SMSF back in 2006. It may be overstating to say the promise of franking credit refunds was one of the attractions, but nonetheless it was.

Power and other guest writers are following this story while it remains a live issue so if you have a vested interest, here’s the link:

It does seem as if Bill Shorten is hanging his hat on this particular peg and plans to leave it there.

“When this (cash refund) first came in, it cost Australian taxpayers about $500 million a year,” he wrote. “Within the next few years, it’s going to cost $8 billion a year, more than the Commonwealth spends on public schools or childcare. It’s three times what we spend on the Australian Federal Police.”

You can see where he is shining his head torch when he writes that 50% of tax refunds go to SMSFs with balances of more than $2.4 million. Fine, stick it to the top end of town, but look further into this dodgy policy, Bill, and you will see that unless you giveretirees on modest incomes a break, they will be forced to rely more on the public purse. They will resent that and in turn resent you.

FOMM back pages: http://bobwords.com.au/super-end-week/

ATM fees abolition a smoke screen?

If you were feeling all warm and fuzzy about the Big Four banks deciding to drop the hated ‘foreign’ ATM fees, sorry, the feeling won’t last. For a start, the Commonwealth Bank’s decision to go first didn’t last long. The CBA announced the fee abolition early on Sunday (aiming for a slow news day lead). But within hours, Westpac, the ANZ and National Bank of Australia had all suddenly (on a Sunday) released statements that they had come to the same point of view. The likely reason is that the boards of all four banks (and others) have had the ATM fees item on their agendas for a while now, just waiting for the right time to tell their media people to press “go”.

And they make it sound like they’re doing us all a big favour. Banks have been gouging ATM fees (typically $2 or $2.50) since the Reserve Bank of Australia first said they could, in March 2009. The main ‘victims’ of this unjust fee (for using an ATM owned by another bank), were the people who travel interstate or intrastate and had no choice.

RBA data tells us there were 251.65 million ‘foreign’ ATM withdrawals in the last financial year. Deutsche Bank estimates the Big Four have foregone about $117 million by dropping the ATM fee, according to the Australian Financial Review. But that’s a modest amount compared to the $4.4 billion we collectively pay out in bank fees every year.

RateCity analysis of RBA data shows the average mortgage holder paid $471 on banking fees last year. That includes $240 a year in home loan fees and $231 in credit card fees.

In this context as some have suggested, the ATM fees abolition story is a PR smoke screen. ABC senior business correspondent Peter Ryan said of Sunday’s news coup…“the planned, if not co-ordinated, decision is mostly about banks doing what it takes to avoid a royal commission into bad banking behaviour.”

The most recent media disclosures about money laundering allegations compound other image issues for banks, including financial advice scandals and allegations of market manipulation and misleading conduct.

While the big bank PR people might be spinning this as “listening to our consumers”, the real story is ATMs are becoming less popular.

Reserve Bank of Australia (RBA) data shows ATM use is falling and falling sharply. Monthly withdrawal transactions have fallen from a high of 78.427 million in December 2008 to 48.684 million in January 2017.

Banking analysts ascribe this sharp downturn in ATM use to the now ubiquitous “tap” method of paying for anything from a Mars bar to a week’s worth of groceries. There is also the “any cash out?” query whenever you spend money in a supermarket or bottle shop.

Pat McConnell, Visiting Fellow, Macquarie University Applied Finance Centre, says new technologies will soon be launched that further undermine ATMs. The biggest will be the New Payments Platform (NPP). Another is OSKO, a new payment mechanism from the developers of BPAY.

McConnell writing for The Conversation, says the NPP will change the way that payments are made in Australia.

“Rather than putting a payment on a credit card or waiting a few days for a payment from another bank to clear, with NPP payments will be cleared in a few minutes or less. Using NPP, anyone will be able to make an almost instantaneous transfer of funds into the bank of a supplier, such as a plumber.”

As McConnell puts it, with NPP, everyone with a smartphone and spare cash is an ATM.

Technology changes go some way to explaining why so many bank branches are closing or relocating to kiosk-style retail outlets. Last week, for the first time, I withdrew cash from an ATM outside the local Bank of Queensland branch. I did so because the Suncorp branch in Maleny closed in mid-September and with it went the Suncorp ATM. Suncorp’s advice was to use (a) the BOQ-branded ATM across the road or (b) withdraw cash at the Post Office. Transaction duly completed, I was pleased/relieved to find that I was not charged a fee for using the other provider’s ATM.

(Incidentally, Suncorp announced on Tuesday it would scrap ‘foreign’ fees on its 400 ATMs Australia-wide by the end of December).

There are still six ATMs in Maleny, although the jury is out as to which won’t charge a fee if you bank with someone else.

In case you didn’t know, some ATMs (the ones found in pubs, casinos, convenience stores, roadhouses and other retail outlets) may charge you a fee regardless. What the Big Bank decision to scrap ATM fees means for their business model remains to be seen.

Maleny has just two banks left (Bank of Queensland and Maleny Credit Union (now called MCU Ltd). The ANZ left its ATM in place and established a mobile business bank at the other end of the street.

Since 2007, the number of bank branches in Australia has dropped from 6,600 in 2007 to fewer than 5,600. Branch closures are ongoing, with the Finance Sector Union recently revealing Westpac branch closures in Western Australia and Victoria.

When our local Suncorp branch closed, we went in to check out rumours of cake. Yes, there was (gluten-free) cake, iced in Suncorp colours.

We popped in to say “bye”, but ironically tellers were too pre-occupied serving customers for other than a quick “thanks and good luck”.

What’s bothering me more, honestly, is my habit of collecting gold coins in a container and, once I have $100 or so, banking the cash in my account. Oh, you do that too? The gals at Suncorp didn’t have a problem with this old-school habit. We were told (by Suncorp) we could do basic banking business at the local Australia Post branch. I queued up yesterday, banked $30 in gold coins and it was no drama at all. I even got a receipt.

Now, about that late fee for missing a credit card payment by one day…