Thursday, April 30, 2015

Shabby chic not a good plan for tourism

Australia’s tourism industry has moments of optimism when external factors like a falling Aussie dollar auger well for international arrivals. But mainly it’s stuck in a rut, promoting the same experiences and the same, increasingly tired product. No amount of taxpayer funded advertising campaigns will change this fundamental problem.

Recently, the new Queensland Government pulled the pin on a proposed cruise ship terminal for the Gold Coast. According to its proponents, the project would have involved a $6.47 billion construction bill, $840 million in direct infrastructure impacts, 5,000 new jobs in construction and more than 15,000 direct and indirect jobs on completion. What they didn’t add is that it offered the sort of refreshed tourism product that places like the Gold Coast desperately need. These tourism businesses – created without relying on any taxpayer contributions – spend significant sums advertising their destination appeal. They do more work in this regard than any number of taxpayer tourism organisations can hope to. It would not only have meant new tourism infrastructure for the Coast, but a renewed appeal and additional marketing grunt on a global scale. It would certainly do better than a two week long, government endorsed underage drinking festival called ‘schoolies.’

But no. It was scrapped to appease some eco-warriors concerned that it would mean the demise of an artificial wave break island in the midst of a very busy water way where everything from jet skis to sailboats, seaplanes, paragliders, fishing boats, charter boats, boozy boat tours, tourist ducks and pretty much everything else has created the maritime equivalent of Times Square. Yep, it’s just the sort of pristine environment we need to protect.

The point though is that this latest news follows a long line of projects, announced with much fanfare but which then fall victim to a slow death by regulatory intervention, environmental impact studies, planning appeals, vocal interest groups and various often spurious environmental agendas. Some fall to a quick death by political intervention, which must surely be less painful and less costly for the proponents in the long run.

You begin to wonder why anyone would want to run the gauntlet of having a major new tourism project given the green light in Australia. They risk a great deal of money in the process with no guarantee of anything ever happening. It’s their money and they can take it anywhere, and Australia has a lot of competition up against it in terms of rival destinations. The South Pacific is littered with ‘beach culture’ resorts as is much of South East Asia. The climate is just as appealing and their cost base so much lower that even many Australians prefer to holiday there than locally.

These tourism investors are offering Australian destinations the chance to reinvent their destination image and reputation, and they should be being welcomed with open arms. Without new product in the form of attractions, hotels, resorts, restaurants, shops, entertainment and tours, all that our destinations have to rely on are the existing mix of operators many of them in charge of facilities which are now more than 20 years old – roughly since the last time we saw a wave of fresh investment into tourism. 

Our product range is dated and tired and our image and reputation is suffering with it. No amount of chintzy tourism campaigns will change the fact that we risk a ‘been there, done that’ reputation in global markets.

Back to our Gold Coast cruise ship proposal. Here’s a question for you. If it was Singapore, or Vietnam, or somewhere in the Phillipines or maybe Indonesia, or perhaps the Pacific Islands, do you think they would have said “no” to a brand new multi-billion dollar facility at no cost to taxpayers which would in turn help them create more jobs and training opportunities for young people, earn foreign income, do a lot of the legwork for their destination marketing and bring global attention to their destination?

I doubt it. 

Tuesday, April 14, 2015

Why raising the GST could hit new housing hard.

As Governments state and federal begin grappling with harsher budget realities and an electorate disinterested in listening when it comes to the necessity of budget cuts or asset privatisation, it becomes increasingly likely that Australia will follow the New Zealand path and raise the GST. This could hit housing especially hard because of the way new housing is taxed.

First, let’s recap on the current GST. First proposed in 1985 by Labor Treasurer Paul Keating, it was dropped for political expediency. Then in 1991, it was again proposed by Dr John Hewson as Federal Liberal Opposition Leader, but the GST died a quick death at the hands of interviewer Mike Willisee (and Paul Keating), who asked a pointed question about the icing on a cake. Hewson stumbled, momentum was lost, and Hewson lost the election. We didn’t see the GST return until Liberal Prime Minister John Howard took the proposal for the GST and major tax reform to an election in 1998, and won.

The GST, introduced in 2000, was originally to apply to pretty much everything, but lobbying by the Democrats (mainly) led to a negotiated GST which didn’t apply to things like fresh food, or books. The other part of the negotiation was with the states, who in return for receiving 100 per cent of the revenues created by the GST, promised to abolish a range of taxes, stamp duty included.

That’s where the housing equation comes in. Stamp duty on housing sales is a huge impost and a disincentive to more freely trading real estate. It’s also a big money earner for the states, but so was the GST. The GST revenue would have exceeded what the states then received from stamp duty, hence the agreement.

That may well have worked, but they all broke that promise. The states kept stamp duties and other taxes they had promised to abolish, and also said ‘thanks very much’ for the new rivers of gold in the form of GST revenues. As a result, new housing immediately had 10 per cent added to its price, while any compensation in the form of abolished stamp duties didn’t eventuate.

Take a modest $500,000 new home or home unit in Australia today. The purchaser – in addition to various local and state infrastructure charges – is paying 1/11th of that purchase as GST. That’s around $45,500 in GST going to the states - a very big tax bill on a single purchase. Plus, depending on the state, there’s anywhere from around $10,000 or $20,000 in stamp duty. Many first home buyers are exempt from stamp duty, but the nature of grants and exemptions vary.

Those exemptions also apply to second hand homes, while the GST only applies to new homes (houses or units). Plus, infrastructure levies and other ‘developer costs’ only apply to new housing, not to existing or second hand stock. Already new housing is punitively taxed whereas second hand stock isn’t, via the GST and via other state or local charges on infrastructure.

What happens if governments turn to an increase in the GST to fill multiple budget black holes? Plenty are talking about it, as are plenty of economists. Many will argue it’s a good thing, but it isn't if you’re in the market for a new home (as opposed to second hand), or if you’re a developer creating new housing stock.

If the GST was raised to 15 per cent - as many suggest – our $500,000 property jumps by nearly another $23,000 overnight. A second hand house sitting right next door experiences no change in tax treatment. So the new home buyer is now paying $522,727 for our hypothetical house, of which now $68,100 is GST. Add to that the various infrastructure charges, duties, charges and various taxes or levies, and people buying a new house in this scenario could easily be paying well over $150,000 in total taxes on their new home.

Housing in Australia is expensive enough as it is. Failing to create a healthy volume of low cost new housing supply, rather than stoking the already hot fires of the existing second hand property market, has worried a lot of people from the Reserve Bank Governor down.

If changes to the GST in the form of an increased rate are allowed to go ahead without some balance being restored to the new versus second hand treatment of our housing stock, it is likely that genuine new housing supply (as opposed to investor product though even this would suffer) will stall further. Unless I’m wrong, and an extra $23,000 tax bill on a single transaction isn’t something that bothers people these days.