Equality...

                                                                                                                         (Illustration by Mike Lester)

If you're a member of a club or community you either firmly believe in the 80/20 rule or if you don't it'll make sense & resonate with you for sometime, if not your the rest of your life.

It is the premise that 80% of the work is done by 20% of the people.

It comes from the Pareto Principle or Pareto Wealth Distribution where it's stated that 80% of the wealth will end up with just 20% of the people. Its not a new trendy buzz phrase, this is an old idea from an Italian civil engineer named Vilfredo Pareto. He was born in Paris in 1848 & died in Switzerland in 1923.

What astounds people when they look into this amazing life ratio is that it still applies no matter what the form of government or economy is in play.

Capitalism, Democratic Socialism, Communism. It's a feature of capitalist Japan today as it was 300 years ago in feudal Japan. It's play now in Cuba, Zimbabwe & China as well as Canada, the UK and France. It's in play in North America & North Korea.

It is sadly the reason that socialism/communism and any other Marxist derivative becomes very popular in the minds of young, subversive have nots and some half haves on the outer. Reason is they think the 80/20 rule can be ruled out by law. It cannot. The defining underlying driver is humans & how they act.

There are those in desperate poverty & it is the duty of all of us to help those people, those least able to help themselves but the left wing action want everyone on the same level, which of course means stealing often by the point of a gun. In less totalitarian countries it's the idea of taxing the wealthiest.
Generally this doesn't work for long. Those who are the wealthiest 20% will use all manner of mechanisms from tax accounting to reduce their exposure or just plain emigrate to a tax haven country. Which of course does no good for anyone. You eventually return to maintain an 80/20 rule of wealth distribution but with less total wealth, or the poor get poorer still.

Those wearing Che Guevara shirts usually are subversive but mostly are those who do not know how blood thirsty he was as a cold killer of his fellow man. How does class warfare be a thing when you're slaughtering people of different view or from a different street. Also, there has never ever been a nation or economy of a Marxist/Socialist/Communist stripe that has been successful without killing or stealing and even then, when it runs out of other people's money and enemies of the state it will implode.

How this is lost on young people I'll never know.

But the claim that only a square root of any given population will be very successful is very predictable but its considered very unfair. Why add unfair?
Life is not about equal outcomes for everyone, no matter what leftists tell you socialism can deliver.
It can't.
But of that square root of any given population that's very successful, the square root of them is incredibly successful, incredibly wealthy. Those who become very successful, "more is added unto them".

Bill Gates from the USA is considered very if not incredibly successful. Well how do you define successful because Burt Munro from New Zealand was also incredibly successful at what he did...he just didn't die a wealthy man.

Whatever happened to "do the best you can with what you've got and where you can help others" ?

If you're without anything, getting something raises you.
Somehow though, we have a young thinking set across all ages of society that thinks some form or other of socialism is the answer.

Leftist singer song writer Billy Bragg is a multi millionaire, so too is Labor leader Bill Shorten.
For all the class warfare cat calling and gas lighting they're a part of, they are totally unaffected. I wonder why the rebellious don't rise up and tip them out first before marching towards the electoral booth with burning lamps and sharp pitch forks.

80/20 wealth distribution even applies in the Labor party and is the core basis of George Orwell's Animal Farm.

The real answer is be happy with what you have, do the best with have you're got, help those who cannot help themselves & build strong vibrant communities.

 

Sadly humans gravitate to tribalism of one sort of another despite the fact that 80/20 remains.

The thing with capitalism is its the only successful, self sustaining system known to man. Its the only system where there is migration in & out of the wealthy. Should point out Bill Gates' grand parents were not wealthy but his parents did go on to be better off, Bill went onto be very well off. 100 years from today its inevitable that all Bill's descendants WON'T be super wealthy like him. Some will be successful at what they do and some won't. Some might even be below the poverty line.

Marxist derivatives are not the answer to any problem. Indeed in the middle east peace only happens in bursts and even then the only system that last is a strict if not brutal hierarchical one.

None of the Chardonnay Socialists from fine upbringings in leafy suburbs seem too intent on helping their oppressed brothers & sisters under constant class oppression.

Odd.

Odder still is that Chardonnay Socialists in Australia still think that socialism is the saving grace of mankind.

Despite the constant and overwhelming facts throughout history.

"The World Was A Perfect Place Until The Humans Got Here"

Not For Profit Organisations & Corporate Governance

If you have Structure & Process right you are off to a good start. Most NFPs (Not For Profit Organisations) are lacking in Structure, Process and knowledge of their respective rights & responsibilities.

Good Structure leads (hopefully) to good knowledge of Process.
That then leads to good compliance and lessened legal exposure.
Straight behind that is the directors, Management, Committees and their members knowing the limitations of their roles and what to do (properly) if they see an issue outside their Governance confines.

Soon after that, efficiencies start arriving, generally people get to spend more time (because they have more time) doing what it is they personally are required to do.

Once the efficiencies arrive then the natural progression if all the planets align as they are very much supposed to, is vision and strategy. That probably should be the first reason for being but at this point, its a review thing...are we all here for these reasons, what additional reasons are their now?

When all these boxes are ticked, we have purpose, structure, process, strategy all neatly sorted and widely well known and accepted then without noticing one thing quietly sneaks in and makes itself at home and will remain as long as everyone remains cognisant of structure & process and new entries are orientated properly... Culture.

When your NFP hits this point you probably need to know you will not turn rivers into wine but you will see a vast improvement in what the organisation can do with what limited resources it has.

The greatest benefit is, people stop wrongly treading on other peoples toes.

For example, got a problem with a committee outcome, a committee you're on?
What's your first port of call.
The Chair of the Committee. Not staff, not other committee members, you don't rally an army.

Got a staff related issue or staff member related issue?
What's your first port of call?
Not the staff member, not other directors.
First port of call is always the Chairman of the Board who will tale to the CEO.

The most important relationship in an organisation is between the Chairman of the Board and the CEO.

Managing staff is the job of the CEO - Do not interfere or you have crossed the governance line.
Chairman listens to your concerns, addresses it with the CEO.
They, via the Chairman get back to you with the answers. If you're still not happy you advise the Chairman you wish to bring it up at a Board meeting & have all directors briefed out of session prior to the meeting (by the Chairman or by the Chairman/CEO)

Directors DO NOT GET INVOLVED WITH STAFF.
That's micro managing and is not a Directors role

Have problem with a committee or sub-committee's work or pathway?
Who's your first port of call?
Ideally the Chairman of the board if you're a Director.
If you're a lay member, the Chairman.
The Chairman addresses the concerns not with one of the committee members but with the Chair of the committee in question.

If a Committee makes a decision involving staff, he directive goes to CEO either via the board's CEO or via the Committee's Chair & the Board's Chairman. No committee member should be approaching staff.
That's micro managing, a breach of good corporate governance and is definitely wrongful interference.

If you have a board you need a board charter. What you can and can't do, what your role is.
You also need a Code of Conduct. I point to the AICD's Code of Conduct for it's members as a perfect template.

Committees, should have a Committee Charter set by whichever part of the organisation it reports to.
It maybe a committee reporting to the board, it maybe a Sub Committee reporting to a Committee & the board. End of the day, the board must approve of the Code of Conduct and the Board MUST approve of all Board and committee charters. The board is where the buck stops and a committee cannot & must not decide for itself what it does, when & how for itself. If that happens, you have an autonomous "shadow board" whether that is the intention or not.

Sounds complex, but once these simple boxes are ticked, compliance is raised and running by the new rules & understandings becomes easier.

Be aware though, you need to check with people within the structure to confirm if they do know what the structure is, what the respective roles are and what their rules of engagement & limitations are. If more than one person has a differing view of who's supposed to do what & how you have an unpinned grenade.

Get everyone and I mean everyone on the same page.

This sits in within the aims of Fiduciary Duty and the Reasonable Person's Test.
If some are devoutly resisting the change to proper structure, process and compliance chances are they'll get with the programme or eventually leave. The board has many roles, but ensuring compliance is just one. They will eventually have to deal with opponents of good corporate governance and decent compliance.

Once bedded, things run easier and smoother and factions or power groups don't get a look in.
Everyone including (if not especially) your members/shareholders.

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Further Reading (Perhaps for many, Must Read)
https://www2.deloitte.com/content/dam/Deloitte/ca/Documents/public-sector/ca-en-public-sector-effective-npo-board.pdf

This is an online portal specifically to offer resources for NFP Boards & Committees. Here are some good, simple to understand Online Training resources
https://www.communitydoor.org.au/boards-and-management-committees/governance-online-training

Another excellent resource for the NFP Boards & Committees. Its also very affordable and more NFP centred than some training. "OurCommunity" also has a good deal of very useful free resources.
https://www.ourcommunity.com.au/

The Franking Credits Refund Issue Explained

So, the Franking Credits Refund Issue...A good fellow who asked to remain nameless put this together. Yes it's long, because it's thorough, very thorough. It spells it out very well.

The Franking Credits Refund Issue



It is a very complicated area.
 By way of an example only….
 Fred Farmer retires at age 65 and after paying off all his debts has enough to buy himself a nice house in Albany, has $500,00 0 in Wesfarmers Shares, and $900,000 in his Self-Managed Super Fund (Being the proceeds he invested over 40 years of farming). He also has $ 25,000 in the bank in his own name.

Because of his assert base he doesn’t qualify for the pension, and being fiercely independent he does not want it either.

Of his Super Fund, he has invested $675,000 in 6 shares that he likes, and $225,000 in Term Deposits with the Bank that supported him all through his farming career.

So his Self-Managed Super Fund (SMSF) has the following profile:

$225,000 in Term Deposits at 2.60% pa = $ 5,850 a year in interest income

$125,000 In Telstra Shares at 4.87% yield Fully Franked

$112,500 In Macquarie Group Shares @ 3.69% yield Fully Franked

$112,500 In Wesfarmers Shares @ 6.92% yield Fully Franked

$112,500 In Woolworths Shares @ 3.16% yield Fully Franked

$112,500 in AGL Shares @ 5.84% yield Fully Franked

$112,500 In Woodside Shares @ 4.30% yield Fully Franked

Therefore his Dividend Income is $ 32,400 a year

His Franking Credits are a further $ 13,837 a year.
 This assumes all the dividends are 100% franked. Some companies are not.
 (That would be the case where a lot of the company income is earned overseas.)


Franking works like this: Let’s say Telstra pays you $700 in dividends.
Telstra has paid 30% tax on that already = $ 300

That is your Franking Credit.


On your tax return you would show income of $1,000 from Telstra being the $700 in cash you got plus the attached $300 Franking Credit.

The franking credit is able to be offset against any tax you have to pay.

So if you had to pay $400 in tax – then you could deduct $300 in respect of the Franking Credit (As Telstra has already paid the tax) So you would only owe $100 in Tax not $400.
If you tax bill was $150, you still deduct $300 and thus get a $150 REFUND of the surplus Franking Credits. (It is this bit Mr. Shorten wants to rip off you!)


This is the same as what would happen if you were on a wage/salary income, and your employer deducted too much tax, or you had lots of deductions that lowered your tax below what your employer had already deducted. In other words. It’s you money you are getting back. Telstra provided you with a tax credit, otherwise you would be taxed twice on the Dividend (Once at Telstra’s end and then on $700 at your end)

So Back to Fred Farmer’s SMSF for the year

His result would look like this:

Interest Income $ 5,850

Dividends $ 32,400

Franking Credits $ 13,837
Total Income $ 52,087
  Operating Costs of the SMSF $ 3,000 (Accounting / Audit Etc.)
Net Income $ 49,087
  If Fred was not yet drawing a Pension from his SMSF (IE it is still in Accumulation mode), then his tax would be 15% of $49,087 or about $ 7,363 but remember he has the Franking Credits up his sleeve totalling $ 13,837 – so he deducts his credits off his tax payable and gets a refund in cash into his SMSF bank account of $ 6,474. (Mr. Shorten wants to keep that bit instead.)

So Fred SMSF would have a net income of $41, 724 now or $ 35,250 if the Labor policy is adopted.

It’s even worse of Fred has converted his SMSF to pension phase.
Pension Phase SMSF’s do not pay tax.

So the Franking Credits of $13,837 would all come back into Fred’s SMSF as a REFUND in Cash.

Mr. Shorten wants to keep all of that.

That’s the bit that is wrong. The Companies have already paid the tax on the shareholder’s behalf. Now Mr. Shorten wants to keep that from being refunded to them.

Bear in mind that tax on Contributions and income of the fund for its life before it was converted to a pension, was 15% on the way in. That is why it is supposed to be tax free on the way out.

So that’s Fred’s SMSF position

In his own right he earns dividends of $34,600 on his $500,000 worth of Wesfarmers Shares and gets a further $14,850 Franking Credit.

His $25,000 of bank deposits (at call) earn his another 1% interest = $ 250.00

So his Taxable personal income is $49,700

Let’s ignore any deductions or discounts he can get, to avoid complicating the example.

His tax position would be:

Taxable Income $ 49,700

Tax on First $18,200 Nil

Tax on next $18,800 $ 3,572

Tax on next $12,700 $4,127

Medicare Levy $ 994 (2% of $49,700)


TOTAL TAX $ 8,693
  But again, he has those franking Credit of $ 14,850 to offset what he owes the Tax Dept, so he gets a refund of $ 6,157 ($ 14,850 less $ 8,693).

Mr. Shorten wants to keep that bit too.

So Fred Farmer who has worked hard all his life to provide for his retirement in comfort, and not be a burden on the taxpayer by drawing a pension, will see his total income (Personal and SMSF) reduced from $ 90,094 (After the tax on his personal income) to $ 70,100 – a difference of $19,994 that Mr. Shorten and his cronies want to trouser for the Government so they can give it to other people who don’t pay tax because they are unemployed or unemployable, but likely to vote for Labor, which they think Fred Farmer doesn’t.
Effectively this is an income reduction for Fred Farmer in the above scenario of 22.19% Interestingly if Fred Farmer does not operate a SMSF and uses a Union Super Fund, the Franking Tax Rip-off does not apply. The Union Super Fund gets to claim the value of the Franking Credits. They use this to offset the amount of tax they have to pay for all their members who are still in the Accumulation Phase. Robbing Peter to Pay Paul.

Also if Fred happened to be on a part pension when Labor decided on this, then Mr. Shorten has given his an "Exemption" because he is a pensioner (and perhaps a Labor voter).

There’s plenty of ways Fred Farmer can address all this if it comes in (And it would have to pass the Senate as well as the lower house – and control of the Senate is not yet certain unless it is a real landslide instead of just the train –wreck it looks like).

He can sell his SMSF shares and replace them with companies that earn the bulk of their income overseas and thus have minimal franking credits, but pay higher dividends. That’s not really what he wants to do, as he has supported the companies he has dealt with for years as a farmer – like Wesfarmers etc. But he will be penalized for that conviction now.

He can cease all his generous donations to all the good causes he has supported for years, thus reducing his tax deductions and using up the franking credits in his personal income. The lost Franking refund is replaced by the donations he no longer makes. All those charities, will then be running to the Federal Government for funding, or shutting down their much needed services. (Good luck with that!)

So that’s the Franking Credits bit explained.

Other parts of the story relate to the proposal Labor has for the Negative Gearing and Capital Gains Tax regimes.
Negative Gearing
 Labor’s proposal is to disallow Negative Gearing on existing properties – only allow it on newly built ones. (To do otherwise would kill the housing industry)

For those who don’t understand what Negative Gearing is – here is a very simplified versions:

Bill and Jill Battler are trying to improve their financial circumstances by investing in real estate.

They buy a house for $500,000 all up including Stamp Duty and Settlement Costs.

It is then rented out for $ 400 a week = $20,800 a year.

It costs about $10,000 a year to run the house (Rates/Insurance/Accounting Fees/ etc) So they make about $ 10,800 a year on their $500,000 outlay or around 2.16% - not even as much as a bank Term Deposit (2.5%), but if the house value goes up they get a Capital Gain. A Term Deposit never gets a capital gain – you get back what you invested – unless the bank goes belly-up and you are not covered by the $250,000 Government Guarantee (Which you wouldn’t be if you invested $500,000).

But back to Bill and Jill Battler. They didn’t have $500,000 up their sleeve – they only had $150,000 that Jill’s mother left them in her will when she died.

So they borrowed $350,000 from a Bank to fund the rest.

Over 25 years at 4% interest their loan payments are $1,847 per month or $ 22,164 per annum.

As their costs are already $10,000 a year, their total outlay is now $ 32,164 per year. But because they can now also claim the interest on the bank loan as a deduction, they get a claim of just under $14,000 in interest in the first year. That reduces their taxable income by $14,000.

As they only have $10,800 left over from the rent after the $10,000 costs, this deduction wipes out all of that $10,800 as being taxable income. In addition they still get a further $3,200 deduction against their other taxable income (Wage and Salary income etc.). If they were on a 32.5% tax bracket (plus 2% Medicare levy), the saved tax on that $14,000 at 34.5% would result in $4,830 less tax payable. And on their existing Wages and Salary extra deduction, that is worth $1,311 in tax refunds from what they have already paid via the PAYG system on their wages.

As you can see it still doesn’t fully cover their annual outlay to keep the house, but their hope is that the value will go up by more than enough to cover this over time.

That’s called Negative Gearing – The costs outweigh the income and result in a tax refund.

Mr. Shorten wants to stop that for existing houses. So Bill and Jill Battler will not be able to claim the $14,000 interest deduction. As you can see that makes the whole thing un-workable and they would not do it.

What are some of the implications of this?
 A sharp drop in investment real estate for existing houses:

o Prices fall

o Rental properties dry up

o Rents go up due to competition for the fewer houses

o Public Housing waiting lists explode (Viz: Hawke/Keating era)
 
Real Estate Agents lose business as investors build instead of buying.

Teachers/Nurses/Police Personnel/Military Personnel/Prison Officers/Bank Clerks etc all lose the ability to chase promotions that entail moving to other locations and temporarily renting out their existing houses until such time as they can return.

o With no interest deductions available on their existing housing loans, their ability to pay rent in their new location as well as meet the payments on their existing loan is severely reduced.

o This makes the proposition of moving to improve their income via promotions etc. much less appealing.

o It will be harder to attract these occupations to rural and regional areas that already have enough difficulty in that area.

 If they do persevere in the hope that they can manage, then find out after three years, that it is too hard, and then sell their existing house, Mr. Shorten has a surprise instore for them on that front as well. He is going to reduce the Capital Gains Tax discount from 50% to 25% when the investment (Property/Share etc.) is held for more than 12 months. So instead of getting a 50% discount on the gain in the value of their property over the three years since they moved, that only get a 25% discount. The capital gain would be taxed on 75% of the gain not 50%.

o Another reason they will not move to rural and regional areas.



Who will these proposed changes impact most?

Self-Funded retirees not drawing a pension (IE: Those who are not presently a burden on the pension system)

Share Investors with a high proportion of franked dividend paying Australian Shares in their portfolios

Share Investors with margin loans (No Negative Gearing will be allowed)

Investors buying existing properties (No Negative Gearing Allowed – Capital Gains reductions halved).

The tenants who might have lived in those properties were they available for rent

People seeking to accept promotions in Rural and Regional areas who will no longer be able to claim the interest on their existing home loans when they rent out their existing house to take up their new role

The same people above, when they go to sell the house because they can no longer afford it, and find their capital gains tax has increased because they can only get a 25% reduction not a 50% reduction as now.

Charitable groups who rely upon donations from retired people – these people will not need tax deductions anymore.

Real Estate Agents who will sell a lot less existing houses to investors

Property owners who are looking to sell their existing house into a market where all the investors are buying blocks of land and building.

The list goes on…

 

All in all very bad public policy on a number of fronts.

Mr. Shorten and Mr. Bowen’s response?

Frankly – We don’t give a damn

Don’t vote for us.