Calculating the proposed Mining 40% Tax

What is actually the resource super profit tax?  What real issue is at hand?

The Resource Super Profits Tax - what is it?

Glenda Kwek

May 11, 2010

The Resource Super Profits Tax is a 40 per cent tax on mining profits, which is in addition to the usual company income tax. It is planned to start on July 1, 2012.

How does it work?

Mining companies are allowed to subtract a tax-free allowance of 6 per cent from their existing earnings - called the RSPT allowance.

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In the first five years of the scheme, they can also subtract an accelerated rate of depreciation.

The remaining amount is taxed at 40 per cent - the "super tax". The remaining amount is taxed again, at 28 per cent.

For example

Revenue = $100 and

Expenses = $50

Your profit = $50

You can then subtract depreciation, with the allowance - set at 6 per cent.

So if RSPT allowance = $3

You are left with $50 - $3 = $47

The $47 is taxed at 40 per cent (the super tax).

So $47 x 0.4 = $18.80 and you are left with $ 28.20

The $28.20 is taxed again at 28 per cent (the company tax).

So $21.20 x 0.28 = $7.90 and you are left with $20.30.

That adds up to about a total tax of about 57 per cent.

How does it differ from the old tax regime?

*The royalties that resource companies have to pay to states now will be refunded by the federal government. Miners could argue that the royalties introduced uncertainty into the market as they were subject to change without notice.

*Company tax will be lowered from 30 per cent to 28 per cent.

*Resource companies can claim accelerated depreciationbefore the super tax kicks in, on prior investments for the first five years.

All new investment will be subject to the normal depreciation. The 6 per cent rate is applied here.

So do other industries have a similar tax regime?

Yes. The petroleum industry is one example. It has been operating under such a regime since the 1990s.

The difference is that it has a higher allowance - 11 per cent.

So why are there points of contention with the RSPT?

*It's not a super profits tax

Miners argue that the government is not just taxing more when it's boom time, but taxing more all the time.

"At the moment, it doesn't appear that there is this premium that comes in and out depending on whether these companies are making super or normal profits," UBS chief economist Scott Haslem says.

"That's the issue. It just appears like we have a higher marginal tax rate on every dollar forever."

*6 per cent allowance is too low

Back to our earlier use of numbers. What's at issue is the $3 (6 per cent of $50).

This 6 per cent is too low, miners say. It's how much return you get on an ultra-safe investment. But their investments cost a lot and are highly risky. They say they should have a higher allowance (which means a lower amount of money is taxed after the allowance is subtracted).

Petroleum companies, as mentioned above, have an allowance of 11 per cent. The resources companies are not arguing for such a high rate - but they do want something between 6 and 11 per cent.

(Note: The 6 per cent is calculated from the government's long-term bond rate.)

*$9 billion tax take a year

The resource companies dispute the government's figures that it will get $9 billion a year in super tax on miners.

$9 billion "is not a steady state long-term growth estimate", Haslem says. It's a lower tax take calculated when accelerated depreciation is taken into account. That means that if today's profits are replicated in five years after the regime kicks in, mining companies would be playing even more tax.

**Background on the RSPT was complied with the help of Scott Haslem, chief economist at UBS.

Source: SMH, 11 May 2010

If you want to read more:

The first hurdle: define a super profit

Who's next to cop a super tax  

New mining tax will cut long-term growth, UBS economists predict

Full federal budget coverage

 

Valuing A Property

To all property lovers,

highly relevant for you in or about to go into the market :-)

How do valuers value?

By Peter Boehm

May 24 1  May 24, 2010 

Peter Boehm

How much do you really know about property valuation? Peter Boehm takes us through the detailed process, and dishes some tips on what adds value to a property and what doesn't.

Whenever you borrow to buy a residential property your lender will instruct a professional valuer to get independent confirmation that the property represents adequate security for its loan and that the amount advanced will not breach the agreed loan to value ratio (LVR). The LVR is a function of how much is borrowed and how much the property is deemed to be worth. So a $300,000 home loan on a property valued at $400,000 would result in a loan to value ratio of 75% (300,000/400,000).

Valuations provide the lender with a price that could be realised if the property had to be sold within ninety days of purchase, given reasonable marketing and an arms-length transaction between a willing buyer and a willing seller. Lenders are looking at a worst case scenario where the property has to be sold reasonably quickly either through repossession or mutual agreement.

Valuations are not the same as a price estimate

It's important to understand that an estate agent's price estimate is not the same as a professional valuation. A price estimate merely acts as a guide to assist in the marketing and selling of the property - it is not a proper valuation and has no formal standing e.g. it's not recognised by the courts or by lenders when assessing a home loan application. A recognised property valuation can only be carried out by a fully licensed valuer.

The valuation process

A full and comprehensive valuation starts with an internal and external inspection of the property. It normally takes around 48 hours for a standard three page report to be produced. Valuation reports vary in price depending on the property type and the report format requested but for an average sized property costs start at around $300 plus GST.

Some of the key attributes the valuer will consider include:

• The land size, property aspect, topography and layout of the block.
• The size and layout of the residence.
• The location of the property in relation to schools, public transport, shops and amenities.
• The architectural style of the dwelling.
• How well the property has been maintained.
• What potential there might be e.g. renovation or redevelopment.
• Number of rooms, including bedrooms, bathrooms and the size of the kitchen.

Valuations are professional opinions based as much on art as on science because they take into consideration both tangible and intangible aspects of a property including its surrounds. According to Greville Pabst of WBP Property Group, there are three methods valuers use to come up with a property value range; direct comparison, summation and capitalisation of net income.

Different valuation methods

The direct comparison method looks at researching recent sales of similar properties (within the last six months) and comparing and contrasting those properties with the subject property. The comparison properties thereby act as a valuation guide enabling the valuer to compare like with like and to make adjustments (up or down) if there are any material differences between the properties.

The summation method comprises adding the value of the land to the value of the improvements on the land, which include things like the house, pool, garage and pergola. Land value takes into account things like its size, shape, location, topography and surrounding infrastructure and amendments. The value of the improvements is determined by taking into account things like age, style, architectural features, room numbers, renovations and overall appearance.

Valuers use a combination of these two methods to determine a valuation range and then use their skills and experience to come up with their valuation figure.

The third method, capitalisation of net income, involves applying an investment yield to the property to work out rental income which is then discounted to determine market value. This approach is more commonly used with investment properties.

What adds value to a property?

Valuers look for attributes that can add or reduce a property's value. It's useful to know which ones are good and which ones are bad as this can help not only in the selection of a property, but also in identifying undervalued properties and aiding in the type and extent of potential renovations. Some of the positive factors include:

• Aspect - things like water views can add significant value to a property.
• Proximity to lifestyle amenities.
• Land size.
• Development potential.
• Architectural style e.g. inner city Edwardian and Victorian styles.
• More than one bathroom - two is good.
• Modern well appointed kitchens.
• The condition and age of bathroom(s). As with kitchens, modern bathrooms are sought after.

What reduces a property's value?

Conversely there are certain attributes that may reduce a property's value. These include:

• Proximity to main road traffic.
• Mixed use property e.g. residential/commercial.
• Environmental risks e.g. overhead power lines.
• Poor proximity to public transport, shops and other amenities.
• Poor room layout and design which reduces openness of internal areas.
• The size and layout of rooms.
• Small land component.
• Poor state of repair of the buildings.

What happens if the valuation comes in under the purchase price?

Normally the valuation will come in around the purchase price - after all, that is what the market is willing to pay. But there could be times when it comes in under or over meaning you may have paid too much or got yourself a bargain. 

If the valuation comes in under the purchase price, you could be in a spot of bother because the lender's LVR restrictions may limit the amount you can borrow meaning you may not be able to afford the property.  Take for example a situation where you are looking to buy a house for $400,000 and have saved up a 10% deposit of $40,000 and your lender is willing to lend 90% of the property's value. So far so good because you'll have enough to buy the property i.e. $40,000 + $360,000 = $400,000. But if the valuation came in at $380,000, the lender would limit its loan to $342,000 ($380,000 x 90%) meaning you would have to find another $18,000 (see the table below) or in the worst case, walk away from the purchase - something you can't do if you've bought by auction.



How do you select a valuer?

Normally your lender will select a valuer from its panel - one that is local to the property you are looking to buy. However, there may be occasions when you'll want to appoint a valuer yourself - for instance, to help you set your upper limit if you're bidding at auction.

Whatever your reasons, if you're looking for a good valuer the first thing you should do is make sure he or she is a full member of the Australian Property Institute, Australia's peak body for property professionals. In addition, you need to check the valuer is appropriately licensed in the State or Territory they operate in. For example, valuers in NSW must be registered under the Valuers Act 2003. Finally, it's a good idea to find out who the valuer's clients are. For example, if they include any of the big banks this can give you some comfort you're dealing with someone decent, as the banks have strict valuation criteria.

Have you ever used a valuer before? Did they do a good job? (Share your views below)

Want to know how much your property is really worth? Check out Top Choice Home Loan's Right Price Report. Thinking about buying a home? Visit Top Choice Home Loans for everything you need to know about home buying, including a free seven week email course.

http://au.pfinance.yahoo.com/b/peterboehm/1194/how-do-valuers-value/

Upfront & trailing commissions to be banned

definitely major changes to how some rebate companies will be working... (EJ)

Financial advisers' super slice to get axe

PETER MARTIN

April 26, 2010

Financial planners will have to earn their keep openly from their customers as part of sweeping changes that will outlaw kickbacks and commissions and revolutionise superannuation from 2012.

Fiercely resisted by parts of the industry, the changes go further than recommended by the Senate inquiry set up in the wake of the collapse of the Storm financial group, which cost thousands of people their life savings.

That inquiry recommended in November that the government merely ''consult with and support industry'' to find a way of ending payments by superannuation fund managers to financial advisers.

Instead Minister Chris Bowen will legislate to ban the payment of all types of commissions on all investments other than insurance from July 2012.

The legislation will also require financial planners to ''place clients' interests ahead of their own'' - which they are not currently obliged to do.

''The reforms will give Australians advice that is in their best interests, rather than the result of incentives or commissions,'' said Mr Bowen.

Crucially the new law will not only ban the payment of upfront commissions, sometimes worth 1 to 2 per cent of the sum invested, but also the hidden but more significant ''trailing commissions'' worth 0.55 to 0.60 per cent of the funds under management for each year that it stays invested. On a $200,000 investment these can cost $1200 per year, or more than $24,000 over 20 years, whether or not continuing advice is received.

The financial research firm Rainmaker estimates that Australians pay more than $1 billion in ongoing commissions per year.

''This will end the kickbacks and commissions and inertia payments that four million Australians have endured for decades,'' Industry Super Network head David Whiteley said. ''It'll make the commercial funds more like our industry funds.''

The Coalition has indicated it will oppose such reforms. Treasury spokesman Joe Hockey gave the industry a commitment in November that ''the Liberal Party will not support the banning of commissions''.

The changes will apply only prospectively, meaning that Australians in existing superannuation funds will continue to pay ongoing commissions for as long as they remain in those funds, giving the industry time to adjust. However changes to the operation of so-called default funds are likely to outlaw the payment of trailing commissions for 80 per cent of fund members in any case.

To soften the blow of upfront charging by financial advisers, the minister has hinted the government will make such charges tax deductible when it responds to the Henry Review. The concession would cost $1 billion. Mr Bowen said the government would reveal its position on tax deductibility when it responds to the Henry review next Sunday.

http://www.theage.com.au/business/financial-advisers-super-slice-to-get-axe-20100425-tlod.html

The keywords are: leading investment banks - money laundering - susceptible to white-collar crime...

Major banks linked to money laundering

MICHAEL WEST

April 20, 2010

POLICE and corporate regulators have raided homes and businesses to smash a crime syndicate that launders money through the stockmarket after getting inside tip-offs from leading investment banks.

The crime ring, whose network extends from New South Wales to Western Australia, uses young people with little means to extract cash from ATMs after successful share trades executed through Commonwealth Bank's online broker, CommSec.

Police raided the homes of two Deutsche Bank employees on April 9 searching for email and phone records and documents in connection with the WA syndicate. They were searching for trades in brewer Lion Nathan before an $8 billion takeover bid by Japanese brewer Kirin.

Shares in Lion Nathan jumped from $8 to more than $11 in late April last year when the deal was announced, delivering a stellar profit to those who had bought shares before the announcement. Among those who profited are people with links to organised crime in WA.

Deutsche Bank is not suspected of any wrongdoing and is co-operating with authorities in the investigation. The bank was, on the same day as the raids, issued with a notice to produce information by the Australian Securities and Investments Commission, with which it complied. The bank did not comment on the matter last night.

In late May last year, ASIC was alerted to suspicious trading in Caltex shares. Caltex's share price rose from $11 to $12 on news that it intended to buy Mobil's petrol stations.

Another leading investment bank has been the subject of preliminary ASIC inquiries over the Caltex trading but has not been issued with a notice to produce. One of its employees is alleged to have provided information to the syndicate about Caltex before the announcement.

The Caltex deal was later blocked on competition grounds but a taskforce from ASIC homed in on one $500,000-plus trade in which parties linked to the crime syndicate had benefited.

Sources said the syndicate members relied on young people to remit the cash by withdrawing $1000 amounts - the daily limit - from ATMs.

This was a method, said the source, of laundering money from illegal activities.

Spokespeople for CommSec and Deutsche Bank declined to comment about the investigation.

The trading in Lion and Caltex shares is one part of a wide-ranging investigation into insider trading in which several companies and individuals have been issued with notices to produce information. The crime syndicate is believed to have garnered trading tips from several sources and traded in a range of shares on the stock exchange.

The share trading has been conducted through what are thought to be fake company names along with fake names of individuals behind them.

Insider trading is notoriously hard to prove because stock tips are mostly provided by word of mouth and there is rarely a paper trail or recorded conversation to produce in evidence.

http://www.theage.com.au/business/major-banks-linked-to-money-laundering-20100419-spet.html

Looking for business & tax advice?

Beware who to go to.

Tax agent or accountant? Who to go to for advice?

MAX NEWNHAM

April 12, 2010 

WHETHER you are thinking of starting a business for the first time, or have been in business for many years, it is vitally important to get the right advice. In a lot of cases people get this advice from accountants. Unfortunately not all accountants were created equal.

In many cases people believe they have an accountant, when in actual fact they have a tax agent. Tax agents tend to mainly look back and are focused only on completing forms for the tax office and other regulators. Accountants on the other hand, as well as taking care of the compliance work, are more focused on the business and are also looking forward.

If you regard preparing financial statements as an administrative burden rather than an opportunity to gauge the health of your business, and a visit to the accountant as only slightly better than a dental appointment, a tax agent will probably be more than adequate for you.

If on the other hand you want to ensure you are operating your business in the most tax effective structure available, and want ongoing advice on how to maximise your profits while minimising taxes, you need an accountant.

The best way to judge is by asking the following questions;

•     Are you able to contact your accountant by phone relatively easily when you need them

•     Does your accountant return phone calls promptly and no later than the morning of the day after your call

•     Does your accountant suggest ways of improving your business or tax situation

•     Does your accountant answer your questions in a way you can understand or do they say they don't offer advice in that area

•     Is your accountant interested in you and your business, and

•     Does your accountant pay fines for problems caused by them

If you answered no to any of these questions you more than likely have a tax agent.

For some reason business owners find it hard to change accountants. This can often be due to the misconception that a new accountant will not know enough about their tax affairs. Nothing could be further from the truth. A good accountant should, in only a very short space of time, and using the financial statements and tax returns prepared by the previous accountant, obtain a very clear picture of how a business operates and what the tax and financial issues are.

The process of selecting a new accountant starts with the first phone call. If your call is not answered promptly, you are placed on hold for an excessive period of time, and are put through the third degree by a receptionist, the chances are they will not be any better than what you currently have.

If you get through to the accountant without too much trouble, you should ask them what they try to achieve for their clients. If the answer is all about lodging tax returns on time and other compliance issues, they will more than likely be a tax agent.

If the answer is that they assist clients to maximise the potential of their business and the profits, while ensuring they don't pay more tax than they have to, they will more than likely be an accountant.

In the first interview, once they have a quick review of the financial statements and tax returns, a good accountant will be able to ask intelligent question about how you operate the business and what you want from it, and offer initial advice on where they see things can be improved.

Source: http://www.smh.com.au/small-business/finance/tax-agent-or-accountant-who-to-go-to-for-advice-20100412-s2kx.html

Financial mismatch calls for creative accounting

... in a top-level broadband deal.

Canberra needs creative accounting: NBN

• Jennifer Hewett, National affairs correspondent 
• From:The Australian 
• March 20, 2010 12:00AM

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A FRUSTRATED Telstra has finally belled the cat on the tortuous negotiations over the national broadband network.

The real significance of the company's statement to the ASX yesterday lies in the implicit warning to government that Canberra needs to urgently come up with some creative accounting to make this deal possible.

Telstra pointed out there was a "significant gap" between what it and NBN Co considered to be an acceptable financial outcome. In very deliberate phrasing, it also noted that these negotiations were currently being conducted on a "business to business" basis.

That is a polite way of saying that NBN Co, which is supposed to run as a commercial operation, can't or won't agree to pay another commercial operation, Telstra, what it thinks its assets are worth.

Related Coverage

• Telstra desperate for NBN deal The Australian, 1 day ago
• Big gap for Telstra Herald Sun, 4 days ago
• Telstra extorting over NBN, lobby says The Australian, 4 days ago
• Telstra warns of NBN 'gap'Herald Sun, 4 days ago
• Telstra safe from poaching by NBN Adelaide Now, 10 Mar 2010

But Telstra noted the company was discussing ways in which this gap could be bridged, "recognising that the government has highlighted the national interest benefits of the NBN and reform of the telecommunications industry".

The invitation could not be plainer. If Canberra views this new broadband network as a national interest issue, it should help out with some form of extra public funding or assistance that will allow the two businesses to reach a commercial compromise. But right now it looks more like a case of lose, lose, lose -- for Telstra, for NBN Co and for the government. So far the government, despite being just as desperate for a deal, has not been willing to provide any such additional financial assistance beyond the $4.7 billion of public money already committed. Even if it had the money, this would be politically devastating.

And it is this huge financial mismatch that is far more crucial than whether or not the government has its NBN legislation stalled in the Senate. In fact, the delay in the bill until after the budget suits the government, as it attempts to see whether or not a deal with Telstra will actually come off.

It's another reason Canberra is sitting on the implementation study that reportedly says a broadband network is viable without Telstra's co-operation -- but will also point out the complications of this and of the whole project.

That leaves a lot of uncertainties and nasties for the government to explain away as the opposition seeks to attack.

But it is also true that time is running out for the government to have a credible account of progress on its big broadband plan before the next election. That's why no one can afford to delay much longer on announcing a deal -- or not.

Communications Minister Stephen Conroy wants Telstra to understand that no matter how painful failure to reach a deal would be for the government, it would be bloodier still for Telstra. Think of it as the nuclear option.

Either Telstra signs up within a few weeks or the government deploys every punishment it can against the company and scrambles around to negotiate a series of deals with Telstra's competitors.

These alternatives would be piecemeal rather than national in scope, slower rather than quicker to set up and the costs potentially even more expensive and unpredictable -- even without the need to compensate Telstra.

It is certainly not Canberra's preferred outcome -- just as it is not Telstra's, which knows it will then face the full wrath of a vengeful government. It's why Telstra was negotiating "constructively" and some modest progress has been made. But the remaining numbers gap of billions of dollars requires a big leap rather than just more incremental steps.

David Thodey doesn't think he can persuade his already irate shareholders that it is a good idea to undervalue (on its figuring at least) Telstra's assets -- access to its ducts and a migration of its traffic -- while effectively writing off its copper network before it has to. NBN Co's Mike Quigley isn't interested in compensating Telstra shareholders for lost value, but simply assessing what makes the best business case for NBN Co as a commercial project and what it might cost him to use alternative suppliers.

And one roadblock preventing the government considering any additional help to get around this is that Labor outsmarted itself with the way it has consistently described NBN Co as a commercial project. If it were to alter that wording to emphasise the investment as a nation-building project, the supposed $43bn cost would have to be added on to the federal budget -- which Canberra is absolutely determined to avoid.

Thodey also knows that the government will be ready to punish Telstra and that it will almost certainly get legislation passed that gives the minister wide discretion, including cutting off access to spectrum, forcing it out of Foxtel and generally trying to ensure it can't compete with the new fibre network.

What a bloody mess.

Source: The Australian, 20 March 2010