7th Conference on Financial Markets and Corporate Governance

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Superannuation and taxation
John Daley (Grattan Institute), Professor John Freebairn (University of Melbourne), Tom Garcia (AIST)

John Daley (Grattan Institute), Prof John Freebairn (University of Melbourne), Tom Garcia (AIST)

John Daley (Grattan Institute), Prof John Freebairn (University of Melbourne), Tom Garcia (AIST)

The three presenters all argued that the federal Government must agree on the objectives of the superannuation, and ensure tax concessions align to these objectives. Without this, policy ‘tinkering’ is likely and tax concessions will be inefficient or unsustainable. The panellists also agreed superannuation plays a limited role as a source of retirement income – John Daley noted that households hold more wealth in their homes, the age pension and other assets than in superannuation, and Professor John Freebairn argued that superannuation’s more important role is in smoothing consumption over the lifetime. Professor Freebairn outlined the tax setting for various savings options, and noted Australia’s hybrid tax concessions affect the mix of savings products, but not the overall levels of saving. John Daley argued superannuation tax concessions are poorly targeted and therefore have little impact on either the total level of savings, or reliance on the Age Pension.
Tom Garcia stated that there are a limited number of superannuation tax changes that are ‘politically feasible.’ To reduce the amount and frequency of legislative changes to the system, policy reviews or changes should be tied to the release and findings of the Intergenerational Report (released approximately every five years). He suggested that superannuation is most important for ‘middle Australia’, and that tax concessions on contributions from high income earners should be reduced. Based on Grattan Institute analysis that suggests superannuation benefits are largely accruing to the wealthiest segments of the population, John Daley recommended a suite of changes including lowering the annual cap on concessional contributions, introducing a lifetime cap on non-concessional contributions and a 15% tax on all superannuation earnings. John Freebain suggested changes to superannuation taxes should be delivered as a package with a reduction in income taxes.

Dividend imputation: What effects has it had; and should it be dismantled?
Professor Kevin Davis (ACFS), Dr Geoff Warren (CIFR), Dr Andrew Ainsworth (University of Sydney) Karen Payne (Board of Taxation), Professor Bob Officer (University of Melbourne), Associate Professor Graham Partington (The University of Sydney)

Dr Andrew Ainsworth (University of Sydney)

Dr Andrew Ainsworth (University of Sydney)

Professor Davis started the session by reviewing the evidence of the effect of imputation – contrasting ‘domestic segmentation’ and ‘international integration’ views. He argued that imputation has net benefits when compared to a classical tax system (particularly on corporate behaviour), and highlighted the difficulty in identifying a ‘counterfactual’ tax system in the absence of imputation. Dr Warren’s paper was written independently and with a different methodology, but arrives at similar findings, concluding that there is mixed evidence of the impact of imputation on share prices and the cost of capital, but that it appears to have beneficial effects on behaviour.
Dr Ainsworth explored the experiences of nine countries which dismantled their imputation systems between 1999 and 2008. Most of these countries removed imputation following a ruling from the European Court of Justice that is was discriminatory to foreign investors, and they generally lowered their corporate tax rates at the same time. He noted that a ‘transition period’ for the removal of imputation encouraged more orderly behaviour by companies and market participants, and that most countries have continued to change their taxing of dividends since imputation was removed.
In a panel session chaired by Karen Payne, discussants explored a range is issues including the history of dividend imputation in Australia, why economists hate imputation, franking credits and the budget deficit, international tax competitiveness, partial franking credits for foreign investors, the complexity of the tax system and whether its better for companies to retain their earnings, or distribute them to share holders.

Corporate governance and culture
John Brogden AM (Australian Institute of Company Directors), Fiona McNabb (Monash University), Harrison Young (CBA)

John Brogden AM (Australian Institute of Company Directors)

John Brogden AM (Australian Institute of Company Directors)

Panellists Fiona McNabb (Monash University), John Brogden (Australian Institute of Company Directors) and Harrison Young (Commonwealth Bank of Australia), discussed the effects of culture on corporate behaviour. In particular, the focus of this session was to debate the effects of culture on financial financial firms, and explore whether culture has contributed to notablefailures in individual firms or on a systemic basis.
The recurring theme of a flawed incentive system drew the most attention. Panellists agreed that the dominant banking culture tolerates, and sometimes rewards, excessive risk-taking through poorly designed remuneration schemes. As Fiona McNabb noted, “We get the performance that we reward.”
But how has culture become such a problem? Possible causes include traditional banks’ attempts to remain competitive through vertical integration and other strategies based around the concept of economies of scale. The push towards profit maximisation after being publicly listed may be a contributing factor, with panellists noting the short-term focus of market commentary. Is there evidence that profit focused remuneration schemes promote a culture that lead to risk-taking behaviour? Or is there a failure of leadership, tolerance of unresolved issues leads to cultural complacency? Panellists noted the challenges created by bonus structures that are based on KPIs that measure revenue or profit, but not the risk that these were attached to. As John Brogden articulated, “You don’t get rewarded for being too cautious”.
So what can be done? Panellists spoke in different ways about a need for strong communication both within an organisation, and between the management team and the Board. The role of conversation within risk management was emphasised. As Harrison Young noted: “You have to get the director or someone to raise the issues no one wants to talk about. And once you get started, you can’t stop.”

Current issues in banking regulation
Charles Littrell (APRA), Steve Münchenberg (ABA)

Charles Littrell (APRA)

Charles Littrell (APRA)

Following the session on banking culture, Charles Littrell (Australian Prudential Regulation Authority) and Steve Münchenberg (Australian Bankers’ Association) discussed recent developments in banking regulation, and the impact that regulatory change is having on the Australian banking sector.
The overarching theme of Mr Littrell’s presentation was the size and dominance of the major Australian banks in the financial system, and in the economy. Banks hold more than 200% of GDP in assets on their balance sheet, with 80% of these assets being held by the Big 4 banks. Mr Littrell also pointed out that global market participants do not differentiate in the creditworthiness of the Big 4, with very little difference in their credit default swap (CDS) spreads, and a high degree of correlation.
The size and concentration of the Big 4 banks’ assets in Australia – as well as the risk of contagion should a problem occur in one of the Big 4 – were the source of APRA’s agreement with the recommendations of the Financial System Inquiry that Australian banks hold sufficient capital to be “unquestionably strong” on a global basis. The major Australian banks are not only too big to fail, they are “Too big to get sick,” said Mr Littrell.
When questioned on the risks to the Big 4 banks, however, Mr Littrell indicated he thought the biggest risks are likely global in nature. One may be Australia’s reliance on economic development in Asia, and in China in particular. Other risks include major geo-strategic events such as an outbreak of hostilities in the Asia Pacific region. Given the major Australian banks appear to have similar strategies and risk profiles in the eyes of their international creditors, global disruptions might be viewed as impacting the entire sector. Other contributors to risk include the behaviour of the Australian property market and the size of banks’ mortgage books, which makes them vulnerable to the possibility of a downturn.
So how can one guard against these risks and large exposures? Strategies suggested included running ‘pre mortem’ exercises and introducing changes in regulation to encourage banks to raise higher levels of deposits, thereby reducing their reliance on short-term funding.
Reflecting on the earlier discussion around culture, Mr Littrell stated that APRA as the balance sheet regulator did not have much purview on this topic. The focus for APRA going forward will be on banks’ balance sheet funding, including reducing banks’ reliance on short term wholesale funding, and continued development of the Net Stable Funding Ration (NSFR) under the Basel III process.