Posts Tagged ‘federal budget’

Taxing Times: Resources Super Profits Tax (RSPT) Negotiations

Wednesday, June 30th, 2010

Taxing Times: Resources Super Profits Tax (RSPT) Negotiations

One of the first actions by the new Labor government leadership was to adopt a more conciliatory approach to the proposed resource super profits tax (RSPT). The government is eager to approach the big Aussie miners BHP Billiton, Rio Tinto and Xstrata, in order to establish a new process for resolving the proposed RSPT issues.

Under the original RSPT proposal the government has estimated tax takings of $12 billion in the first two years. Most of these takings will come from BHP and RIO and it is estimated the earnings will be hit by 15% for BHP and 25% for RIO.

Any compromise over the proposed tax will impact the federal budget forecasts, with treasurer Wayne Swan quick to reiterate that cuts backs in the RSPT revenue will impact the Budgets in the areas of superannuation, company tax cuts and infrastructure spending commitments.

Miners are fiercely combating the proposed RSPT because it is seen as setting a precedent for overseas governments in relation to their tax environments into the future. The big miners of course are not interested in whether the government can balance its budget, but they have made moves to negotiate over the tax.

BHP’s CEO Marius Kloppers was quick to offer the government an olive branch in suspending their damaging advertising campaign, however at the same time he restated the stance of the big miners that the new tax: should only apply to new projects, should distinguish between the commodities being mined and should be levied close to the extraction point. The big miners are prepared to pay more tax, indicating support for a profit based tax to replace royalties.

RSPT – The Government and Miners Need to Resolve:

The question that needs to be resolved in any negotiations include:

What will the tax rate be? Currently the tax rate will be 40 per cent.

Will the new tax apply to existing projects? Big miners say NO! The government will be keen to see the tax to apply to existing projects because that will encompass the highly profitable Pilbara mines in Western Australia.

What is the threshold rate where the tax will kick in? Miners wants a significant
increase in the threshold at which the levy kicks in ( from 6% up to 15%)

How will the new tax impact on depreciation allowances?

What will happen with write-offs for new capital spending?

How will the tax be applied to assets? Whether at book or market value.

At what point will the tax be levied? Big miners are pushing for the point of extraction, but the government is also considering taxing after any value-adding due to processing has occurred.

Our View – The Proposed RSPT is Hurting Our Mining Sector

Mining activities have been impacted as a result of this new proposed tax. Miners have shelved some projects, banks are re-evaluating extension of credit for projects, foreign investment has been withdrawn due to the ongoing uncertainty over the tax and we have seen weakness in the Aussie dollar.

The government is still under pressure to resolve this issue before the looming federal election, and miners are threatening to resume their advertising campaign in the next two weeks. Fortescue’s CEO Andrew Forrest claims that he was close to resolving the issue with Prime Minister Kevin Rudd before the leadership challenge, so you would expect this to provide a base level for ongoing discussions.

There is a case for both parties to compromise on the tax. This is particularly the case given the continuing uncertainty regarding the global economic outlook as seen overnight. We expect that this RSPT has to be resolved before the next federal election.

By Micheal Hevern
Head of Research

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No Frills – No Surprises!

Wednesday, May 12th, 2010

There were few surprises in last night’s budget. The key focus on spending is in Healthcare and funding will come from tobacco tax hikes, axing the emissions trading scheme, and the Resource Rent tax.

The budget is forecast to go into surplus in 2013 ahead of schedule.

Budget – some highlights:

Expect to get back in surplus in 2013 much sooner than previously forecast.

The key spending focus was on Healthcare: An additional $2.2 billion for the health system was announced, taking total investments over the next five years to $7.3 billion; also $355 million will go towards new GP super clinics and upgrades at existing facilities and $417 million for an after-hours health services, including Medicare Locals; $523 million was also allocated to train nurses and a new roll-out of a $467 million e-health records system

Also extracted saving from Healthcare with: $2.5 billion in savings over the next five years through reforms to the Pharmaceutical Benefits Scheme ; The tax offset threshold for health-related expenses will be raised by $500 to $2000, a move that will save the government about $350 million.

The Henry Tax Review measures were confirmed, covering changes to the superannuation guarantee (12% in 2012), a cut in the company tax rate to 28 per cent and a 40 per cent tax on mining profits to fund infrastructure in resource states.

The controversial Resource Rent Tax remains as initially proposed. This is set to increase by $9 billion in the short order. The government calls this a super normal profits tax and BHP and RIO are set to be the hardest hit by the changes. The 40 percent tax on resource profits will start from 2012 and raise $12 billion in its first two years.

Tobacco tax hikes are expected to deliver $5 billion over four years.

Business incentives include company tax rates to be cut from 30 per cent to 28 per cent from July 2011 and small businesses will be able to write-off assets up to $5000.

There are new tax incentives for savings, however these savings will be limited to the first $1,000 of interest earned (an extra $177 in your pocket).

In July 2012 PAYE will be able to simplify their tax returns, affecting six million Australians.

The bracket creep was addresses, come July 1 it equates to an extra $9 a week for a workers earning $50,000.

Addressing the looming emerging skills shortfall, the Government will spend $661 million to provide up to 70,000 new training and places and support about 22,500 new apprentices.

The budget funding depends on Resource Rent Tax passing and China’s insatiable demands for commodities continuing to fund spending.

Our View

The Australian economy has come through the Global Financial Crisis remarkably unscathed and the issues over the sovereign debt in Europe is a timely reminder. The government is relying on our growing export markets and the implementation of the Resource Rent Tax to fund the budget. Time will tell whether our dream run can continue, or whether we too experience contagion from overseas influences.

By Michael Hevern
Head of Research

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Wednesday, 12th May 2010 Morning Wrap

Wednesday, May 12th, 2010

Presented by Michael Hevern
MDS Financial

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US Markets
Pullback After Surge on European $1Tn Bailout Package

SP500: down 0.3% at 1,155.8

DOW down 0.3% at 10,748

Broadly Lower – Investors Nervous

NASDAQ: flat at 2,375

Dollar Index: Strong, Euro Weakens
A$ up 89.33c

FTSE: Up 5.2% at 5,387.4 – Brown Out!; New Government

DAX up 0.3% – ECB $1T Rescue

Oil: down 1.1% at ($75.90)

Lower – focus still on oil spill in Gulf of Mexico

Gold: up 2.6% at ($1,232)
Commodities Weigh;

SPI: below key 4600 ASX

SPI up 20 (0.4%) at 4577

ASX News

Budget – refer to blog post

Banks – to benefit from budget: Super changes; and tax incentives for savings, however these savings will be limited to the first $1,000 of interest earned (an extra $177 in your pocket).

FMG – JBWere figures show the government’s proposed resource rent tax could strip a third of earnings from the company. ”Fortescue has a greater impact for its earnings and valuations, and its impact from spiking prices than BHP Billiton, as Fortescue has all its operations in Australia, all its exposure to high-margin iron ore and, unlike BHP Billiton, has no petroleum exposure, which is already subject to the petroleum resource rent tax,” Goldman said.

PDN – Paladin – Uranium One the Canadian operator has increased its stake.

Gold miners will be in focus today, including: Lihir and Newcrest; KCN, RSG, Equinox, PNA, as gold prices are at new highs.

AIO – the ports and rail operator will write down the value of its assets by $1.1 billion, which will see the company report a third straight annual loss.

Note the Market volatility is on the rise and we the suggest trading strategy is to get small, reduce you exposure to equities. Be prepared to open/hold short positions.

ASX – to open lower

US & UK/Europe – negative leads

U.S. ADRs – Generally Negative!!!…

BHP down 2.9% & RIO down %; AWC down 6.6% ANZ down 3.3% & NAB down 3.3% NEM up 4.9%, JHX down 1.0%, NWS down 1.1%

Commodities Stock Index down 0.5%
Gold Stocks Index up 5.5%
Oil Stocks Index down 1.2%

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A Tectonic Shift in Trader Psychology?

Monday, May 10th, 2010

Last week may well have been the big turnaround in the traders’ mindsets that we’ve been waiting for. Since March last year traders have been buying into dips, but this week will confirm whether they reverse their strategy and sell into rallies. Many of the world markets are at key levels of support after experiencing a shock last week.

If the European Central Bank cannot agree on its sovereign debt rescue package in short order, at the very least we would expect a test of last weeks lows near term.

The 10% dip on the Dow Jones last Thursday has shaken the confidence of investors and traders alike. The CBOE Volatility Indicator (VIX) spiked 85% last week, confirming the extreme apprehension as investors race out and buy protection.

The U.S. trading volumes are another indicator that we monitor, and on Thursday $US19 billion worth of equities changed hands. Compare this to the daily average of around $US9 billion per day! The last time we saw volumes of this magnitude was back on the 10th October 2008.

In the U.S. markets spike, the S&P 500 finished down -1.5% at 1,110.2 (down 6.4% for week), while the DOW was down -1.3% at 10,380.4 (down 5.8% for week), and the tech-heavy NASDAQ was down -2.3% at 2,265.6 (down 7.9% for week).

We saw key sectors lower with Home Builders, Techs, Retailers, Banks and Industrials all down around 10% for the week.

In the UK the FTSE 100 finished down -2.6% at 5,123.0 (down 7.7% for week) and across in Eurpoe we saw the German DAX down 3.7% (down 6.8% for week), as concerns continue over the PIGS soveriegn debt issues and the ECB being able to provide a rescue package (in time).

The European Central Bank (ECB) has said it will do “whatever is necessary” and is said to be in crisis talks to negotiate an $US800 billion rescue package to support some 1,100 EU Banks, offering loan guarantees. Banks are becoming wary of lending to each other again, and this is a similar situation as the one that triggered the GFC, when Lehmans collapsed. The ECB is said to be trying to have this package resolved by tonight, before markets open, however given what happened in the U.S. during the GFC we can expect these deals take time (they cannot be resolved overnight).

Aussie Markets

The Aussie markets followed Europe and the U.S. markets lower last week, as investors finally took note of the financial turmoil in the EU. This sent markets spiraling lower. The ASX lost 7% for the week with $90 billion wiped off the Australian sharemarket.

The SPI Futures is at a critical level of 4400 support which has held as support since August last year. We experienced the worst week since November 2008, with a fall of 7%, and the ASX is set to trade lower as the SPI closed down 49 points (or -1.1%) at 4425.

The key drivers for our market this week will be:

  1. Fallout from the ECB action or inaction in resolving the sovereign debt crisis. Remember what happened when the U.S. tried to implement their TARP rescue package – it did not happen overnight.
  2. The Federal Budget is out Tuesday night. We expect a lower than previously forecast deficit. We’ll also receive comment on the state of our economy.
  3. The Henry Review means Materials Stocks will remain in focus, with the government saying tax will not damage the sector, and Miners taking the opportunity to shelve projects (citing the Tax Regime).

We have started the week on the ASX with some promise as the S&P ASX200 is up 1.1% on the open, trading around 4555. However we would expect nervousness into tonight’s overseas trading session and ahead of the Federal Budget. Remember 4400 is a key level which has held as support since August last year, and should the market fail to hold the next level of support will be the low of last week around 4000.

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What's Hot: The Federal Budget 2009

Wednesday, May 20th, 2009

The Treasurer Wayne Swan handed down the Federal Budget recently, revealing what will be the largest deficit on record. The diagram below puts the deficit in perspective.

Treasurer Swan announced plans for the country to embark on the biggest building program in our history, driving budget deficits to records until 2016 to help counter a recession that may swell the unemployment rate to 8.5%. The Government had to grapple with a significant fall in revenue to the tune of $210 billion by 2013 while spending big to stimulate growth.

The main themes of the budget include;

  • The economy is set to contract 0.5% next year followed by a modest 2.25% recovery the following year and faster than trend growth after that.
  • Many of the spending cuts will not take effect until the economy is predicted to be in recovery. This was evident in the Government s plan to increase the eligibility age for the pension to 67 by 2023.
  • No Surplus until 2015 after a deficit of $58 billion this year.
  • Unemployment to peak at 8.5% in 2011.
  • $22 billion to be spent on Roads, Rail, Ports and Hospitals. This will benefit business through a reduction of bottlenecks, improving the nation s supply chain.
  • A huge investment in clean energy to strengthen Australian s climate change response by encouraging innovation in clean energy and low emission technology. $2 billion for carbon capture and storage plus $1.5 billion on solar technologies.
  • Pensioners set for a significant increase of $30 per week for singles, largely paid for by a more aggressive taxation stance on high income earners.
  • The Government is planning to spend more in Government handouts than it has on infrastructure.
  • Standards & Poor s said Australia will keep its AAA rating.

To pay for the programs the Government plans to sell $45 billion worth of bonds this year, while the figure is set to surge to $300 billion over 4 years. This is the major unknown given the huge increase in supply of bonds over the last 12 months. The US is currently issuing bonds to cover its Government debt, which sits well in excess on $10 trillion. If the equity markets continue to improve this reduces the demand of bonds as an alternative investment. On the plus side, major rating agency Standards & Poors has reaffirmed Australia s AAA credit rating.

Infrastructure Spend

The Government plans to spend $22 billion on the Roads, Rail, Ports and Hospitals.

Stocks to watch here include: Bradken Limited (BKN), Downer EDI Limited (DOW), Monadelphous Group Limited (MND), Leighton Holdings Limited (LEI), United Group Limited (UGL) and WorleyParsons Limited (WOR).

Our preferred exposure to this sector is outlined in our MDS Research Special Report. We look to companies with strong management and balance sheets underpinning their excellent business models.

A word of caution though, this sector has had a strong run year to date and many of the stocks are running into resistance around their 200 day moving averages.

Investors and traders should look to either:

  • accumulate on consolidation of these recent gains or;
  • wait for the stock prices to break their recent highs and trade with the momentum.

Clean Energy

Climate change is a key issue going forward and in response to this the Government has allocated a huge investment in clean energy to strengthen Australian s climate change response.

The Government has flagged a $2 billion investment in carbon capture and $1.5 billion on solar technologies to encourage innovation in clean energy.

Coal seam gas stocks have had a great run over the past twelve months and there are still some key stocks you should look to trade in this segment of the market.

Many of these coal seam gas plays have had a tremendous run over the past year, so either look to accumulate on consolidation of these gains or a break to new highs. Our preferred exposures are outlined in our MDS Financial Research Special Report.

Conclusion
The Infrastructure and Clean Energy spend resulting from the Federal Budget will offer excellent opportunities for both traders and investors alike. MDS Financial Research is a service we offer to keep you abreast of the latest developments and trading opportunities as they unfold.

By Michael Hevern
Head of Research

Note: This article is an excerpt of a Special Report published on our MDS Financial Research website. Click here to take up a free trial subscription and view the full report.

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Wednesday, 13th May 2009 MDS Morning Wrap

Wednesday, May 13th, 2009

Presented by Michael Hevern
MDSFinancial

Click here to watch the presentation.

or

Click here to download the mp3 audio recording (1211Kb).

General Advice Only

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In this morning s wrap

DOW: up 0.6%
Fed says Banks are Healthy;
Trade Deficit Better-than-Expected

NASDAQ: down 0.9%
Intel (#1 Chip Maker) 1Q09 Better
But Profit still down 55%

FTSE: down 0.2%
Financials & Miners Weigh; Unemployment at 2.2m
DAX down 0.3% & CAC down 0.5%

NIKKEI: down 1.6%
Nissan to Cut CAPEX;
Toyota Cuts Production by 28% in 2009

Oil: up 0.6% ($59)
Six Month Highs

Gold: up 1.1% ($922)
Commodities Higher;
USD Lower

SPI up 20 (0.5%)
SPI: Critical Levels: 4000 & 3800
Resistance Becomes Support?

ASX News
Budget $22bn spend on infrastructure $58bn deficit (9000/person); Keeps AAA Rating
Inflation 1.75%; Unemployment 8.5%
FXJ F/cast 27% fall in profits (ad revenue)
SGP to raise $1.5bn (`20% disc ~$2.60)
AWB downgrades 1H09 profit F/cast (Brazil problems)
FMG say NO to Shanghai listing speculation
OSH says profits lower if Oil price subdued
Materials, Financials to recover
Golds and Energy provide support
ASX to open higher; US mixed

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Private health rebates slashed

Friday, May 8th, 2009

Private health insurance rebates will be slashed for middle- and high-income earners, in next week s federal budget.

Changes to the taxpayer-funded 30% private health insurance rebates will free up $1.9 billion.

Single people earning more than $74,000 and couples on more than $150,000 will have a decreased rebate, while the rebate will be abolished altogether for singles on $120,000 and couples on $240,000.

Penalties will be raised for high income earners who do not take out private health insurance.

The changes will take effect in July next year.

For more info, read this article in today s Australian.

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Wednesday 8th April 2009 MDS Morning Wrap

Wednesday, April 8th, 2009

Presented by Michael Hevern
MDSFinancial

Click here to watch the presentation.

or

Click here to download the mp3 audio recording (813Kb).

General Advice Only

*************************************************
In this morning s wrap

DOW: up 0.6%
Fed says Banks are Healthy;
Trade Deficit Better-than-Expected

NASDAQ: down 0.9%
Intel (#1 Chip Maker) 1Q09 Better
But Profit still down 55%

FTSE: down 0.2%
Financials & Miners Weigh; Unemployment at 2.2m
DAX down 0.3% & CAC down 0.5%

NIKKEI: down 1.6%
Nissan to Cut CAPEX;
Toyota Cuts Production by 28% in 2009

Oil: up 0.6% ($59)
Six Month Highs

Gold: up 1.1% ($922)
Commodities Higher;
USD Lower

SPI up 20 (0.5%)
SPI: Critical Levels: 4000 & 3800
Resistance Becomes Support?

ASX News
Budget $22bn spend on infrastructure $58bn deficit (9000/person); Keeps AAA Rating
Inflation 1.75%; Unemployment 8.5%
FXJ F/cast 27% fall in profits (ad revenue)
SGP to raise $1.5bn (`20% disc ~$2.60)
AWB downgrades 1H09 profit F/cast (Brazil problems)
FMG say NO to Shanghai listing speculation
OSH says profits lower if Oil price subdued
Materials, Financials to recover
Golds and Energy provide support
ASX to open higher; US mixed

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