Ken Henry on tax reform + save on car insurance

Happy Friday everyone,

I’ve been knee-deep in the whirlwind of profit reporting season on the sharemarket. As usual, some big winners and big disappointments. More on that shortly. 

This week:

• Rental crunch squeezes again.

• A hot start for the 2024 property market.

• Latest returns from superannuation funds.

• Are there better ways to afford car insurance than cut it altogether?

• Stock of the Week: Audinate

• Why isn’t everyone listening to former Treasury boss Ken Henry about tax reform? 

But first, the job market is weakening quickly. Regular readers will know that over the past six months I’ve been questioning the strong employment data because the anecdotal evidence I was getting just didn’t match up. I posed the question of whether there was a delay between all the corporate job cuts and redundancies and them showing up in the official figures. 

Yesterday’s job figures show there may have been some truth in that because unemployment has risen 0.5 per cent in the last five months… that’s a lot. 

The unemployment rate increased to 4.1 per cent in January – it was 3.6 per cent in September 2023. The unemployment and underemployment rates are now the highest in two years. Hours worked also fell by 2.5 per cent in January and have been on a downward trend for the past six months. 

The ABS has pointed out that the rise in unemployment may be a summer seasonal trend: 

While there were more unemployed people in January, there were also more unemployed people who were expecting to start a job in the next four weeks. This may be an indication of a changing seasonal dynamic within the labour market, around when people start working after the summer holiday period. 

In January 2022, 2023 and 2024, around 5 per cent of people who were not employed were attached to a job, compared with around 4 per cent in the January surveys prior to the COVID‑19 pandemic. 

Let’s wait and see whether the February figures confirm this trend or not. 

The bad news is that jobs are getting harder to find. The good news is that a sharply deteriorating jobs market will bring forward any interest rate cuts. The RBA will not want unemployment to go higher than 4.5 per cent.

Politicians should be listening to Ken Henry about tax reform

A couple of weeks ago I called out the federal government for once again (and it’s all sides of politics) caving in when it comes to tax reform. The Stage 3 tax cuts were rightly skewed toward low-to-middle income earners, but the 37 per cent tax bracket should also have been abolished as planned… but it wasn’t.

Our tax system is pretty stupid at the moment because it relies heavily on personal income tax from you and me. Plus it’s incredibly complicated. 

Personal income tax revenue flowing into the government’s bank account is now at record levels. That’s because tax reform should be about spreading the tax streams, but now when there is tax reform the reliance is on personal and corporate tax increases.

Ken Henry was the boss of the Treasury Department for years. He is highly respected and I caught him being interviewed on the ABC this week. He talks so much sense. 

Have a read of what he said: 

Well, over time, we've got to place less reliance on personal income tax, and company tax, and payroll tax. So, less reliance on taxes on labour income and part of capital income. 

For the rest of capital income — which is interest, rent, and capital gains — we've got to do a much better job of getting similar tax treatment across those various forms of capital income. 

Consumption tax, we need to fix up the mess. We thought we fixed it in 2000, but we didn't get as far as we wanted to get. In particular, we've got to get rid of all of those bloody transaction taxes, like stamp duties on insurance. 

And we've got to abolish fuel excise… and figure out a comprehensive road-user charging scheme. 

He also said land was another big area that needs reform, and he'd like to see stamp duties on land abolished and replaced with “a decent property tax”. 

Housing reform would help young Australians get into the market, Henry said: 

Replacing stamp duty with an annual property tax is part of it, but we also need to deal with a more uniform taxation treatment of various forms of capital income, other than company tax. 

What we proposed in the review, and this was just one example, we said you could change the capital gains tax discount from 50 per cent to 40 per cent, do the same with interest, give it a 40 per cent discount, same with property rent, but the quid pro quo is you only get 60 per cent interest deduction, right? 

You could go to a Scandinavian model where you have unified tax treatment of capital income, you just say all capital income, whatever its source, is subject to a flat, I don't know, 25 per cent tax rate. That's it. And you do the same with interest deductions to unify it. 

So, a 25 per cent tax, the deduction's only worth 25 per cent, you can't offset it against other income, or if you do the only benefit you get is 25 per cent. You could do that. That's probably the simpler way of going… I guess if I was writing the review today I would recommend that as the best way of doing it. 

He makes so much sense. I wish the politicians would listen.

Stock of the Week: Audinate

This week, Australian technology darling Audinate released its half yearly results, which sent its share price rocketing once again. In the last 12 months Audinate’s share price is up $12 to over $20 a share… and up $5 this week alone. 

For those who watch my daily share investment show The Call on the ausbiz business streaming network, you’ll know the stock is a perennial favourite with the expert panellists, particularly Gaurav Sodhi from Intelligent Investor. 

Audinate is a leading global provider of professional digital audio networking technologies. 

The company's Dante platform is designed to bring the benefits of computer networking to the professional audio-visual industry. It designs, manufactures, and develops its own products which also enable interface with existing equipment. The company services the live music and events industries, recording studios, media companies, and the corporate sector. 

As Gaurav has been telling us for a couple of years, the Dante platform is so good that it has become a global standard. So it dominates the market and has basically no competitors. Your sound system at home would be using the Dante protocol. 

Gaurav loves the “moat” of being a global standard which keeps competition out. He has been saying Audinate is a $20 stock for a long time, but now that it has reached that level should you be taking profits? Is this as good as it gets for Audinate? 

This week on The Call, Gaurav doubled down on Audinate and said that even at these levels, he still regards it as a “buy”. He said the company continues to deliver on its promises and it will now start to benefit from the research investment and scale. 

Gaurav’s sparring partner on the panel, Mathan Somasundaram from Deep Data Analytics, admitted Gaurav had got it absolutely right but thinks, no matter which company, after such a big run up in share price investors should take some profits. 

Superannuation returns continue to look strong

Superannuation funds have made a good start to 2024 with leading superannuation research house SuperRatings estimating the median balanced option returned 1.1 per cent in January. 

Better than expected December quarter inflation figures – and a belief that we’re at the peak of the interest rate cycle with rate cuts in the second half of this year – have been good for sharemarket sentiment. Markets in Australia and the US are around record highs so super funds should be performing well. 

So far this financial year, super funds returns are 4.9 per cent with five months left in the year. 

The median growth option (whose investments are skewed to shares) increased by an estimated 1.3 per cent in January, while the median capital stable option (which have little exposure to shares) delivered a modest 0.5 per cent return to members.

Pension returns also rose over January, with the median balanced pension option up an estimated 1.1 per cent. While an increase of 1.4 per cent was estimated for the median growth option and a smaller 0.5 per cent for the median capital stable pension option.

This chart from CommBank shows how much rising interest rates are hurting

I interviewed CommBank boss Matt Comyn this week after the bank announced a slight drop in cash profits and a warning that all customers were finding it tough to cope with the steep rise in interest rates… home borrowers, small business owners and consumers with credit card balances. 

But there was one chart in the CommBank results financial pack which really resonated with me. Have a look at this:

Over the last three years the borrowing capacity of a customer has dropped by 40 per cent and for a single homeowner it has halved. 

Everyone focuses on the increase in repayments from rising interest rates, but very few acknowledge that it also dramatically cuts your capacity to borrow. It’s why so many first home buyers are finding it hard to get into the property market.

Property vacancy rates tighten again; rental crisis escalates

As we all know property values and rents are driven by supply and demand. When supply is tight and doesn’t meet demand, values and rents go up as desperate buyers and renters try and outbid their competition for a place to live. 

In the last quarter of 2023, vacancy levels in the rental market looked to be easing and we saw a levelling out in rent increases. But it looks like January saw things tightening again.

According to property group SQM Research national vacancy rates decreased to from 1.3 per cent in December to 1.1per cent in January. 

The total number of rental vacancies Australia-wide now stands at 32,108 residential properties, which is a decrease from 39,797 in December. Sydney, Melbourne, Brisbane, Canberra, Darwin and Hobart vacancy rates fell and in the smaller capital cities, Perth and Adelaide, vacancy rates sat below 1 per cent over January. 

Vacancy rates in the Sydney CBD, Melbourne CBD and Brisbane CBD decreased to 4.5 per cent, 3.8 per cent and 2.5 per cent over January.

With a tightening in stock, rents were up again. Over the 30 days to 14 February, capital city asking rents rose by another 1.4 per cent and 13.1 per cent over the last 12 months… that’s more than three times inflation. 

The national median weekly asking rent for a dwelling is recorded at $ 614.54 per week. Sydney recorded the highest weekly rent for a house at $1,037.08 per week. While Adelaide units offer best rental affordability of all capital cities at $451.20 per week.

According to SQM, the fall in rental vacancies was driven by increased demand from tertiary students following the start of campus semesters for 2024, as well as graduates entering the workforce for the first time. It is a seasonal demand increase we see at the start of every year but this year is problematic due to the current rental market crisis. 

Going forward, SQM’s best-case scenario for renters is that the population growth rate slows considerably this year to an increase of about 360,000 people, which would likely mean a stabilisation in rents starting from the June quarter. The worst-case scenario is if the population continues to boom at current rates.

While the rental crisis isn’t going away, neither is the housing shortage

Despite interest rates being on pause at a high level, demand for property also continues at a high level. Maybe it’s the prospect of a couple of rate cuts later in the year that is giving people confidence, or there are new buyers from the increased migrant intake. 

The year has kicked off with property inspections remaining high, listing authorities showing that more people are coming to market and weekly pricing showing that Australian house prices are rising quickly as a result.

Open home attendance wasn’t a great measure during COVID given restrictions but is now providing a good measure of interest. Ray White tracks the average number of visitors to 40,000 open homes per month. January was a strong month with 16.5 visitors per home… above the three-year average of 15.6. 

Dropping your car insurance cover could potentially put you at risk

Owning and maintaining a car can be one of the biggest contributors to the household bills, but according to new research from Compare the Market (where I am Economic Director) 17.4 per cent of drivers surveyed have ditched comprehensive car insurance in the last 12 months. 

Look I get it. Money is tight, the bill comes in and you think “I’m a safe driver, this is a waste of money”. But as the old saying goes, “insurance is a waste of money… until you need it”. 

According to the research, Aussie drivers aren’t protecting their cars with comprehensive policies due to higher costs, affordability and not thinking their car is worth it. But experts warn that ditching, rather than switching, might cost them more later on.

Instead of cutting insurance cover altogether look for ways to cut premiums down. If people are looking to save a few bucks by giving up their comprehensive car insurance, they are compensating short-term gain for long-term pain. 

Obviously no one wakes up and thinks about wanting to be in a car crash, but sometimes the improbable does happen. If you were found to be at fault without insurance, you could be hundreds, thousands or even tens of thousands of dollars out of pocket in repair or replacement costs. 

If rising costs are the concern, there are a few ways people may be able to reduce their premium, including increasing their excess, paying premiums annually and even re-evaluating how many kilometres they drive on the car and opting for a pay-as-you-drive policy. 

The data also showed that younger generations were opting out of comprehensive insurance at higher rates than older generations. Almost one in three Gen Zers and one in five Millennials have opted out of comprehensive insurance in the past 12 months.

The prevalence of cutting comprehensive car insurance could also be leaving drivers unprotected against car break-ins and personal property theft, as the research also found that as many as 52.5 per cent per cent of people do not park their cars in a locked garage at night.

Comprehensive car insurance not only protects you financially if you were to find yourself in an accident on the road, but may also cover towing costs, theft of personal items, as well as any damage caused by fire, hail, storms, floods and other weather-related damages. 

As many as one in ten drivers say that their car has been broken into. So it’s worrying to see so many people relying on a prayer and hail Mary to spare their savings if their car were to get broken into, or if they were in an accident and were found to be at fault. 

Given that less than half of people are parking inside a locked garage, there are a number of weather factors that could leave them with extensive damage to their car that could be costly to fix. 

If you’re looking to reduce car premiums, the best place to start is to compare different options. There may be policies with other insurers that may offer the same level of cover at a lower price.

Here are three quick ways you could lower the price you pay. 

1. Increase the excess on your policy

By increasing the amount of out-of-pocket costs you’re willing to absorb if you were to make a claim you could get your insurance premium at a cheaper rate. 

2. Pay annually over monthly or fortnightly

While it may be convenient to pay your insurance premium weekly and only see small amounts come out of your bank account, you could save a lot by paying your yearly premium upfront. This doesn’t mean you’re locked in; you can still cancel your policy at any time if you want to switch, and you’ll be able to get your premium back at a pro-rata rate. 

3. Drive less, pay less

If you are using your car less, and perhaps catching public transport or carpooling more, consider switching to a low kilometre or pay-as-you-drive policy.