Wednesday 18 May 2011

standing up to the banks

it's been a little while since i posted here - partly because of blogger going pear-shaped last week but mostly because we have been having so many wonderful posts from our new grouping of brilliant women. i've been sitting back and enjoying everyone's contributions.

today i went to a professional development course. like all professionals, accountants are required to keep up-to-date by attending a certain number of hours of training during the year. many of the issues covered at these courses are mind-numbingly dull, though presenters will usually do their best to liven up proceedings. but really, how exciting can you make changes to private use adjustment calculations for GST? not very.

the course today was a rural update, and started off pretty dull. mostly because i find it hard to get enthused about changes in commodity prices and predictions about fonterra's payouts over the coming 2-3 years, what sheep & beef prices are doing, and the like.

well, they have a little bit of interest in that my mind immediately equates this rise in prices to people going hungry and struggling to make ends meet. and discussions about the growing demand for our dairy exports from the middle classes in china and india make me wonder if the middle classes in those countries are going to price out the poor in our country, so that people here will have to be middle class to afford butter, cheese and maybe even fresh milk. it certainly looks like this will be the case based on current projections, and there is absolutely no strategy or thought being put into ensuring that everyone in our country will enjoy the fruits of our natural resources. as well as the fact that the lower classes in india & china deserve to enjoy quality dairy produce just as much as anyone else.

but no, we didn't really discuss those issues. we were given these economic updates and forecasts so that we could think about tax planning for our farming clients and how they were going to deal with all the extra income. for many of them, it's a very nice problem to have and some will happily rail against the amount of tax they have to pay and the lazy bludgers they are forced to support through the extortion that is the tax system. i can't think of anything i could say that would encourage to view things differently.

but there are another group, and quite a concerning number who are presently up to their necks in bank loans. for them, it's not such a nice story. now, it would be easy to say that these particular farmers are fully responsible for taking on too much debt, but that would hide the role played by banks.

our presenter today gave us some really interesting insights into the working of the major banks in relation to the rural sector. between 3-5 years ago banks were aggressively pushing debt onto people, and particularly in the rural sector. there was a high degree of competition between two banks in particular competing against each other, which lead to these banks probably approving debt that they otherwise wouldn't have done.

but more than that, it lead to some pretty unethical banking practices, and there is no evidence that these kinds of things have stopped. i've had experience of our clients being pushed to buy fully geared rental properties, who are now really struggling. they can't afford to pay the loans, and the value of the properties have dropped so that selling is not going to help them out of their situation. unlike in america, they can't drop the keys off at the bank & walk away debt-free.

it has been equally bad in the rural sector. we were given an example of a farmer who was constantly nagged to buy a neighbouring property. the person from the bank had done all the numbers, and showed that the purchase was completely viable if a portion of the existing farm was sold. the farmer was assured that there would be no hiccups, and the farmer's solicitor was also assured that nothing could possibly go wrong.

except that once the sale & purchase agreement was signed and the $900,000 deposit was paid, the bank decided they weren't going to lend money for the full purchase. in the meantime, the existing farm hadn't done so well and the bank forced a sale on that property, at a loss of $1.5 million. the farmer also lost the $900,000 deposit. the bank person, well they got to keep the commission on selling the debt to the farmer, and suffered no harm. neither did the bank.

our presenter raised the very concerning issue of bank staff, who are going to personally benefit by way of a commission if a deal goes ahead, also acting as budget advisor and in this case pretty much acting as a real estate agent as well. the conflict of interest is huge. the standing that some of these staff have by virtue of their position in the bank is a major factor in creating a sense of trust in their clients, so that clients don't seek independent advice.

there were other examples of the commissioned staff making promises that were subsequently not kept - such as a promise that no changes to the overdraft would be made if further indebtedness was taken on, only for the client to find that their overdraft limit had been reduced from $100,000 to $50,000 as a result of the loan.

on a wider level, a certain one of our foreign-owned banks who has been involved in pushing debt in the rural sector has now decided that asia is a much more profitable prospect, and is tightening up the money supply. given the increase in commodity prices, farmers will be pushed to repay principle at a level that will be very difficult for them to manage, and they are unlikely to obtain further loans for large the large tax payouts that are looming.

the best part of this presentation though, was hearing this presenter advocate for struggling clients. he encouraged us to stand up against the banks by ensuring any budgeting was done by us, and by making sure we were in the room any time banking staff were meeting with our clients. more than that, he said we should do it without charge. i think that's the first time i've heard a presenter say that, and it was really genuinely meant. he didn't mean that we should do screeds of work for free, but that we should consider giving some of our time to ensure that clients were protected and helped to get out of debt through careful plannning. accountants with a social conscience - yay!

i'd dearly love to give this man's name, but i didn't get his permission. the room was packed though, and i really hope that a lot of the people present do take this on board.


DPF:TLDR said...

I thought this post was going to be about John Banks!

One proposal I've seen to reform an industry which has a similar problem of supposedly impartial advisors badgering clients to make transactions that aren't in their interests but which the advisors stand to make a profit on involved the real estate industry. The proposal was simple - remove commissions, instead just giving the relevant staff a higher regular salary. This way they won't rely on making a certain number of sales to reach a certain level of income.

Unknown said...

Really interesting post. I love 'meaty' stuff like this. What's your take on the 'shock horror probe' headlines in the Dom-Post today (on Stuff, but not so prominent) about the amount of tax paid -- or not paid -- by dairy farmers? Naturally, I assume the media are functionally illiterate when it comes to numbers (as am I) so I'm not sure what to make of the articles. They seem pretty thin on actual numbers to me.

stargazer said...

well, i haven't read the articles so can't comment specifically on that. but this is what i know.

many farmers take advantage of multiple business structures such as trading in a company and having the land held in a trust, thereby reducing their tax bill by not paying at the highest rate. also, they can use the income equalisation scheme to deposit money into - any money going into the scheme doesn't get taxed until you withdraw it. so the plan is to withdraw it in years when there is a low dairy payout. however, only cash rich farmers can afford to do this - or if your banker is willing to let you borrow the money, it's usually worthwhile borrowing to do this. but see my comments in the post re tightening of money supply in the rural sector.

the biggest way farmers get out of paying tax is by switching between livestock valuation schemes. it takes a bit of accurate forecasting and any half-decent accountant will have good contacts with farm advisors and be keeping up-to-date with market values for stock. but i know that heaps of farmers around the country paid a bit of extra tax in 2008/09 to switch schemes, and have had massive losses in the 2009/10 year. this means they've paid no tax as well as claiming the maximum in working for families payments.

yes, i think it's appalling, but also totally legal and totally unfair on all other taxpayers. i expect that many will benefit in the current financial year as well.

Unknown said...

Thanks stargazer. Really helpful and informative. It does seem increasingly that it's wage earners who pay not just the highest proportion of their incomes in taxes than anyone else, but perhaps even the most overall.

Scuba Nurse said...

What a fascinating post - thanks so much. Im going to re read it tomorrow, since Im sure it hasnt sunk in properly in my tired state.

Deborah said...

I went to the NZICA tax update seminar a few weeks ago, and apparently there's a discussion paper on the livestock valuation scheme due out sometime in June (I think). It will be interesting to see if it removes the ability to switch so easily. I think the easiest way to do it would simply be to put a time limit on switching, so that it can only be done every say, five years. You would need to put some other rules in around that, to make sure that people couldn't switch business entities in order to be able to switch schemes, but that should be easy enough to do.

Okay... I'll take my tax nerd hat off now and leave quietly.