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Cuffelinks Newsletter Edition 259

  •   22 June 2018

An election fought on tax policy will lead to complex and emotive comparisons, and debate will rapidly descend into divisive claims of a 'class war'. The policy numbers invariably show great dollar amount gains for people in higher tax brackets. It is simply not possible to give a large income tax cut to someone who does not pay much income tax.

This week in Parliament, Labor leader Bill Shorten asked Malcolm Turnbull:

"So under this Prime Minister, should a 60-year-old aged care worker from Burnie aspire to be an investment banker from Rose Bay just so instead of their $10 a week tax cut from the Prime Minister, they can get the Prime Minister's $7,000 a year tax cut for investment bankers?" 

It's a good question from Shorten and rising inequality is not beneficial for society, but the aged care worker might not be paying much income tax. For example, the ATO data below shows the 42% of people earning less than $37,000 pay only 2.4% of income tax. The 3% of people earning over $180,000 pay 30% of income tax. Only 21% earn above $80,000 but they pay over 70% of tax. A person must be earning $1 million to receive the quoted $7,000 tax cut, but according to the ATO tax calculator, they may be paying $423,232 in tax at the moment.      

Number of individuals (left chart) and net tax paid (right chart) by tax bracket 2015-16 

Source: ATO Taxation Statistics, 2015-2016 is latest available data.

Complexity and confusion is inherent in Labor's proposal on franking credits, even creating arguments between Federal Treasury and the Parliamentary Budget Office (PBO). Treasurer Scott Morrison said Labor had not released costings by the PBO, but Jenny Wilkinson from the PBO said its role is to provide a "level playing field" for all Parliamentarians and "trust in policy costings". She said:

"We stand behind the PBO estimates that have been published by the ALP in relation to this policy, noting that all policy costings, no matter who they are prepared by, are subject to uncertainty." 

The PBO had "explicitly assumed" significant behavioural change among SMSF trustees. Labor's Chris Bowen said the PBO has equal standing as Treasury under the Charter of Budget Honesty.

Most of the attention on Labor's policy has centred on SMSFs and pensioners, but a reader has asked about implications outside of super. To answer the question, Jon Kalkman explains franking credits in the simplest way possible in an attempt to clarify (again).

On investing, Anthony Aboud looks at how companies (and fund managers) tend to blame factors outside their control for poor results, while Don Tapscott says we can no longer ignore blockchain. This is one of the clearest explanations of blockchain I have read.

Howard Marks released his client memo this week with a close look at indexing. 

Roger Montgomery takes a swing at the consequences of central banks priming the market with too much liquidity, especially citing Tesla. Similarly, Bank of America wrote this week:

" ... Quantitative Easing was mostly characterized as an environment with too much money chasing too few bonds, lower interest rates, tighter credit spreads and volatility was suppressed ... there is no doubt Quantitative Tightening will lead to the opposite."

Yet most investors are underweight bonds, despite the protection they offer portfolios. We have two introductory pieces. Matthew Lemke looks at how retail investors can access the characteristics that bonds offer, while the White Paper from UBS Asset Management is a primer on bond basics.  

Finally, Bradley Beer warns about new property depreciation rules, and Michael Collinsdescribes the rising power of the Chinese consumer amid the political risks of the trade wars.

Graham Hand, Managing Editor


Edition 259 | 22 Jun 2018 | Editorial | Newsletter



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