Update No. 266 – 06/05/16

Retrospectivity. We sometimes all wish we could change the past. Governments can. Ours just did.

I seldom reference politics on the blog. Don’t want to give half of the population a reason to hate me and not to invest with EGP; I’m trying to build a business, it’s for your own good really that I rarely talk politics! In fact given my leanings cover the political waterfront, I could potentially offend nearer to 100%. Despite this, I shall pass comment.

We all understand the need for Government to raise taxation revenue to provide essential services. Obviously, we all have very different ideas about the level (of both taxation and services). My personal preference would be for a great deal lower level of taxation and the fostering of a culture where self-reliance was a more central tenet. My view is that the more a Government gets involved in the economy, the worse the results become. Switzerland and Singapore bear out this belief fairly starkly, low taxation, low Government intervention and prosperous, innovative societies result.

But we live in a democracy, and tax policy will ultimately drift over time toward the opinion of the median voter. The median voter in Australia evidently wants the Government to take more of their income and get involved in their life much more than I do. I accept this fact. Australia is still the best of all countries to be born into in my humble view, when all qualitative factors are considered.

But the topic for the week was retrospectivity. Tuesday’s budget, with the changes to Superannuation, had the most egregious example of retrospectivity since the Minerals Resource Rent Tax (MRRT) was enacted.

The most curious part of both tax changes is that conceptually, I support them. The minerals of Australia when mined should enrich the citizens of Australia. The proportion of the profits accruing to the citizenry from mining should probably be higher. But when the Rudd Government changed the rules, they reached back into investment decisions made years, sometimes decades ago. If they had come out and said when it was proposed “from (this date in the future – preferably at least a couple of years out), this is the taxation regime that will apply to all new mines or expansions of existing mines”, my support for the proposal would have been unequivocal. But what they instead did was completely alter investment decisions that had been framed under a completely different set of rules. It is quite conceivable that many billions of dollars of investment would have been made into other industries or other jurisdictions had the retrospectively applied rules been in place when the investment decision was made. Sovereign risk was very definitely introduced by the MRRT.

The Superannuation changes proposed by the Turnbull Government on Budget night 2016 are very much the same. The Superannuation system as it was framed was very generous to people able to accumulate large balances. The current rules allowed the system to be used to shield enormous balances that are larger than anyone was ever likely to need in retirement from the tax payable under different structures. That is not the purpose for which Superannuation was created; it is to ensure one can provide for oneself in retirement.

But reaching back into history to change the rules is wrong. If the rules needed changing, a future date should have been proposed and the newly applicable rules set forth. Investments made under the old rules should have continued under those rules. Then savers would have had the opportunity to investigate all the possible savings structures and apply the most appropriate one. As it is now, some people may have made large portions of their savings in a difficult to reverse structure that may not now provide the optimal post-tax result.

I abhor retrospectivity. I have no problem with the rules of the game being changed, but they must be changed and THEN people play by the new rules. If you can’t grasp conceptually the moral wrong that happens when a retrospective rule change takes place, I would liken it to the Government dropping the speed limit and then reviewing fixed speed cameras to issue fines to everyone who had exceeded the new speed limit since the camera was installed.

There is a very simple reason why Governments apply retrospective measures such as those described above. They want the revenues NOW. So the ‘forward budget projections’ look more appetising. But if the purpose of the changes is to create a better, fairer system, then proposing a change and applying it prospectively rather than retrospectively is the only legitimate path – Tony Hansen 06/05/2016

EGP Fund No. 1 Pty Ltd. Up by 10.34%, leading the benchmark by 8.00% since July 1^st 2015. Since inception, EGP Fund No. 1 Pty Ltd is Up by 104.87%, leading the benchmark by 65.28% all-time (April 1^st 2011).

^{*1 after a 31 May 2013 dividend of 2.333 cents per share (cps) plus 1.000 cps Franking Credit, a 31 May 2014 Dividend of 7.000 cps plus 3.000 cps Franking Credit and a 31 May 2015 Dividend of 8.6667 cps plus 3.7143 cps Franking Credit}

^{*2 calculated based on dividends reinvested}