If you have a Super, allocated pension or money invested that is tied to the stock market you should read this and make up you own mind.

Subject: Below are some comments re resource super taxes from a Macquarie analyst.

Dear Clients,

A few Macquarie analysts attended a breakfast meeting with Wayne Swan yesterday. One of the analysts asked why the 40% "Super Profits Tax" kicks in at the long term bond rate which is currently 5.75% (that means that a company will pay this new tax on top of the company tax rate if they earn a return on investment above 5.75%). She asked why the tax did not kick in at a higher rate that was closer to a company’s weighted cost of capital (normally about 10%). Anyone who has studied finance knows that a company will not invest in a new project unless that project will generate a return on investment above the companies cost of capital. The cost of capital is the cost of the companies funds and comprises both debt and equity (see definition http://en.wikipedia.org/wiki/Cost_of_capital).

Apparently Wayne Swan did not understand the question.

Apparently Wayne Swan thought that the long term bond rate was a company’s cost of capital.

The Macquarie analyst then asked if Swan would rule out a super tax on banks. Wayne Swan would not answer the question directly and skirted the issue.


Our analysts also workout that this "Super Profits Tax" applies to anything dug out of the ground. That includes clay, sand, fertiliser, silica etc. It hits the fertiliser, building and construction industries.


The "Super Profits Tax" is not just a tax on resources but a broad based tax which will also hurt the construction/ building and housing industry and all industries where any kind of Australia natural resource is an input to the cost of production.


I am not normally a person to make political comments to my clients and what I am about to say are my own views and not the official Macquarie line. I have a duty to give you my honest opinion on anything that has the potential to significantly affect the markets and your investments. The government’s response to the Henry Review has me deeply shocked. Our market is falling for a 3rd straight day in a row. The share market is a bell weather for the direction of the state of our economy and the market is saying to us right now that Kevin Rudd is pursuing an agenda that is going to destroy economic growth in Australia.

I have listed my analysis of the Labor governments response to the Henry Tax Review as follows:
1. If the Macquarie analyst is right Wayne Swan is financially illiterate and has demonstrable incompetence.
2. The "Super Profit Tax" title is misleading and dishonest. This is a tax on ordinary profits, not super profits. 28% Company tax is still payable along with the 40% "Super Profits" tax, i.e. both are payable at the same time on a return above the bond yield (5.75%).
3. The chart Wayne Swan showed to demonstrate that taxes paid by the resource sector were falling while mining profits were increasing excluded company tax payments. This is a dishonest manipulation of tax data designed to deceive.
4. The proposed increase in super contributions will be offset by a fall in the value of superannuation assets
5. We can safely assume that Labor has privately considered introducing a super tax on banks, especially if taxes from resources dry up.
6. Raising taxes increases the likelihood of cost push inflation, i.e. new taxes may be passed onto consumers in the form of higher prices for products and services.
7. Foreign investors in Australia are alarmed. Australia is now seen as being a high sovereign risk destination to invest. There is a significant risk of major capital flight out of Australia.
8. Capital flight out of Australia would be disastrous for our economy. It will destroy investment, jobs and growth.
9. I saw no tax incentives in the Henry report to encourage innovation and investment in research and development into IT/medical research/renewable energy or any other industry that could be built up to sustain our nation once the resource boom is over. There is no incentive to make the non resource rich Australian States competitive. We will strip our natural resources to pay for our high standard of living while we fail to build the global competitiveness our nation needs when the mining boom is over.
10. I saw no attempt to divert any "super" taxes into a new Australian sovereign wealth fund that could be used to preserve the huge cyclical profits from the mining boom. A new Sovereign Wealth fund could then re-invest real super profits back into building other industries that have the potential to sustain economic growth post the mining boom. Instead all the super taxes will be spent to win votes.

The fall in the value of resource and resource related stocks in the last 3 days has wiped billions of dollars off the value of superannuation and is proof that foreign money is already withdrawing from Australia. An exodus of foreign capital is not something that happens overnight. It could take months to play out. The new "super profits" tax is supposed to generate $12b in 3 years. More than $12bn has been wiped of the market in 3 days.

China is trying to slow its economy down to prevent its economy from bursting as it overheats. Every week we are seeing the Chinese tighten money supply to slow themselves down. Now is not a time to destroy the resource sector while China is at risk of tapping the breaks too hard and slowing itself down too fast.

The big winner out of this will be the US markets.

If the current government of Australia persists in pursuing its agenda as laid out by its response to the Henry Review then I think the only thing that will save Australia from a serious economic slowdown in the next 2 years will be a change of government at the next general election later this year.

Before acting on anything in this email please call me first to discuss your portfolio and investment strategy..
Regards,
Xxxxxxx Xxxxxx l Senior Investment Adviser l Macquarie Equities Limited
Macquarie Private Wealth