Why There’ll Be More Fringe Benefits Tax-Like Bombs in the Future

It’s Friday. We’re tired. Especially after enduring the tortuous climb of Alpe d’Huez twice last night.

But let’s take another look at the ‘economic structure’ angle we’ve been discussing this week. A few days ago, the Australian Federal government announced changes to Fringe Benefits Tax rules, which will have major ramifications for the car leasing industry. The changes come as the government tries to plug a $3.8 billion budget hole caused by changes to the carbon price.

The proposed FBT changes hope to save around $1.8 billion by making it tougher for an individual to gain a tax advantage by leasing a new car. The move has had a major effect on the car leasing industry. NLC, Australia’s largest car leasing company, immediately sacked half its workforce as business ground to a halt.

Salary packaging company McMillan Shakespeare saw its shares plummet 15% on the day of the government’s announcement.

‘So what?’ you may ask.

Well, this is just a tiny example of economic structure in action. A whole industry has evolved based on government regulation. A change to that regulation could threaten the industry’s existence and the employment that it brings. NLC boss Matt Reinehr tells the Financial Review today that his business, built from scratch 23 years ago, is now under threat.

It is especially noteworthy given NLC is perhaps the only start-up company in the world not conceived and started around the kitchen table or the garage. Says Mr Reinehr about his company’s origins, ‘I built it up with a deckchair and a card table and one other person.

The fact that the tax change is a good one (it will stop thousands of people driving around aimlessly to increase their kilometres and tax benefit) is beside the point.

The point is that tax policy is one determinant of economic structure. Low interest rates are another major determinant because the cost of credit is everything. Take away low interest rates and the whole structure of the economy will change. That means high levels of unemployment while the adjustment takes place.

We’re not suggesting that higher interest rates are on their way. We’re just reinforcing the point that the modern day obsession with lower interest rates always being an economic panacea is wrong, because it changes an economy’s structure in unhealthy ways. When inflation finally rears its head and threatens the global economy’s low interest rate structure, and it will, it will be like a snap change to FBT, only on a massive scale.

But that’s all in the future. Don’t worry about it. Go out and buy the S&P500, the ASX200, and sell gold…that’s the trade that seems to be working right now.

The other point to note about the tax change is the pressure on the government to make tax savings when forecast tax revenues don’t eventuate. Over the next two or three years, we think you’re going to see a lot more pressure on the budget as demands for stimulus grow. While new spending measures are assured, much of it will come at the expense of existing tax benefits, whether it be FBT, welfare payments, or even negative gearing. Expect more FBT-like boms in the future.


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From the Archives…

The Agonists and the Ecstasy of the Financial Market
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Interest Rates: Something Wicked This Way Comes
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Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:


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