Australian Elections 2019 | The politics and policies that you need to know - Edition No. 1

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As Australia heads into a federal election year, foreign investors in Australia will be keen to understand the policy directions that may result from election outcomes. In this Lander & Rogers Political Insights publication, our experts provide foreign investors with an update on policy announcements as Australia's political parties accelerate their campaigns.

The politics

Federal

In August 2018 following the Liberal Party's high profile leadership spill, the Hon. Scott Morrison assumed the leadership of the Liberal Party from Malcolm Turnbull and became Australia's Prime Minister. This resulted in a by-election in Mr Turnbull's seat of Wentworth and the loss that followed eroded the Coalition's one-seat majority in the House of Representatives.

The federal (Australia-wide) election is now expected to be held on 18 May 2019. Campaigning has now formally commenced, and policy announcements will be progressively made over the coming months.

Current public opinion polls show that the Labor Party is leading the Coalition by a significant margin, indicating that the federal government is likely to change at the next election.

We expect the key areas for debate leading into the federal election will be:

• Energy policy
• Aged care
• Tax cuts for business
• Government funding of health
• Private pension taxation
• Reform of industrial relations, and
• Immigration and population growth

Victoria

The State of Victoria held a general election on 24 November 2018. The State Labor Government of Premier Daniel Andrews was re-elected with an increased majority, securing a strong mandate for their agenda over the next four years.

In terms of policies, the Victorian Labor Government will vigorously pursue renewable energy and increased transport infrastructure investment. The key opportunities for business lie in these two areas, especially home solar investment.

New South Wales

The State of New South Wales (NSW) will hold a general election in March 2019. The current State Liberal-National Coalition Government, led by Gladys Berejiklian, has been in power since March 2011 with a majority of 17 out of 93 seats in the lower house of the NSW Parliament, although the government recently lost a by-election in a conservative rural seat. Current public opinion polls show the Coalition and Labor parties balanced at around 50/50. The recent leadership difficulties at the federal level of the Liberal Party are expected to hamper the Berejiklian Government's efforts to secure a further term of government.

The key issues in the NSW election will likely be:

• Roads and traffic congestion
• Hospital and school funding

The policies that impact most on foreign investors in Australia

At the time of publication, the federal Liberal-National Coalition has not formally announced any policies. We will report on these over the coming months.

In this edition, we focus on the Labor Party's announced and reported policy proposals.

1. Workplace law policy

The Labor Party has close relations with the labour union organisation known as the ACTU (Australian Council of Trade Unions). Therefore, much of a Labor Government’s workplace law policy will be strongly influenced by ACTU policy announcements. The ACTU's priorities include:

• reducing the rights of employers to hire people on casual labour contracts,
• increasing the rights of unions to bargain across an industry sector rather than bargaining with individual companies,
• increasing the minimum wage level,
• reducing the role of labour hire companies to supply staff instead of normal employees,
• eliminating the gender pay gap, and
• protecting and enhancing the rights of workers to take industrial action.

The Labor Party itself has announced some policies that should be of interest to foreign investors.

• A tightening of the use of the Temporary Skill Shortage visa, currently called the subclass 482 visa, by 'big business' and implementation of strategies to ensure that all jobs are advertised in Australia (known as labour market testing) before they can be awarded to a foreign employee. This will directly impact foreign companies wishing to parachute their management into Australia. However, labour market testing is not required where the International Trade Obligation Exemption applies. There are a number of alternate criteria in this exemption.
• The reform of enterprise bargaining that will increase union power, making it easier to take industrial action and giving unions easier access to workplaces.
• The reintroducing of penalty rates for weekend work.
• Awarding more government contracts to small and medium-sized Australian businesses in order to keep more of the A$50 billion worth of Government contracts (including for major projects such as airports, mines, and railways) with local companies.

The implementation of such policies will be largely dependent on both the size of the government and the support of a number of independent members of the Senate (the federal parliament's second chamber of review) after the 2019 federal election.

2. Renewable energy targets

The Victorian Labor Government has announced a policy of providing subsidies for household solar battery storage, which is part of its program to increase the use of renewable energy in the state to 50% by 2030. This target is a universal Labor Party policy at both federal and state level.

If Labor wins the next federal election, they have said that the Coalition's proposed national energy guarantee (NEG) will remain, but it will include a higher CO2 emission reduction target for electricity of a 45% reduction on 2005 levels by 2030. If there were to be a 50% renewable energy target, there would need to be a corresponding need to manage reliability of the system, particularly as there is nothing within the design of the guarantee that limits the ability of the states to set their own emissions reduction or renewable energy targets. The Labor Party looks determined to maximise the use of renewable energy and has recently suggested that it is considering policy instruments such as contracts for difference (CFD) and an emissions trading scheme for big polluters as transition mechanisms from traditional to renewable energy sources. It is also proposing to fund and support the development of new renewable energy technologies (an additional A$10 billion has been allocated to the government's own clean energy investment fund, Clean Energy Finance Corporation (CEFC), and A$5 billion to modernise existing technology and infrastructure).

Opportunities exist for smart meters, batteries, and related technology to increase the efficiency and reliability where there is more renewable energy used in the system. This will certainly be needed to support the newly announced Labor target of 1 million household battery installations by 2025 (capped at A$200 million) as Labor tries to bring down domestic electricity prices.

Current Labor Party opposition to the development of new coal mines or the expansion of existing coal mines may be difficult to sustain if the Labor Party is in government as they will have to take account of the strong tax revenues from domestic coal businesses and the exports that they generate. However, for now they continue to strongly oppose coal fired power.

As recently confirmed by the ACCC (Australia's competition regulator) in its Gas Inquiry 2017-2020 Interim Report (December 2018), gas will be a major policy issue in the coming years. Because of existing natural gas agreements that have been entered into by domestic gas-providing businesses with buyers from Japan and China, there is expected to be a tightening of the supply-demand balance and some uncertainty about gas supply for domestic use in the states of NSW, Victoria, and South Australia beyond 2019 unless undeveloped gas projects are brought into production. Development of new gas fields onshore will continue to be difficult because of local opposition to coal seam gas and fracking.

In news hot off the press, the Labor Party announced a A$1bn National Hydrogen Plan on 23 January 2019. It proposes to establish a national hydrogen innovation hub at Gladstone, Queensland, as well as kick-start the commercialisation of energy storage technology by providing government funding of over A$50 million (via CEFC and others) to develop technology that will store carbon dioxide from fossil-fuel powered hydrogen production for hydrogen-filling technology, which will support hydrogen-powered cars.

3. Transport infrastructure

Along the eastern seaboard of Australia, the Victorian Government’s A$60 billion infrastructure program, the NSW Government's recently announced Future Transport Strategy 2056, and the Queensland Government's 2018 update to its State Infrastructure Plan are expected to deliver many large infrastructure and technology contracts to Australian and foreign contracting firms and banks following a long period of underinvestment. The banks will participate in the project financing to fund these infrastructure plans.

Because of these huge transport infrastructure projects, many other opportunities will arise in urban development along the transport Immigration routes. The development of suburban hubs around hospitals and major railway stations will go ahead, creating opportunities for foreign investors to invest in intelligent-infrastructure projects using the latest technology from around the globe. The only hurdle may be the Labor Party's focus on awarding more contracts locally, and foreign investors will need to closely understand any changes to federal and state procurement laws as they are announced.

4. Banking and financial services

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has had an immediate impact on retail banking services. As one example, it has already caused a tightening of lending for real estate investment, which is contributing to falling house prices across most capital cities.

For senior management of banks and insurance companies, there is an expectation of better conflict management, increased regulation of remuneration, and increased attention being paid to risk management practices as well as the relationship of banks and insurance companies with the regulators of their industries.

The final report of the Royal Commission was delivered to the federal Government by Commissioner Kenneth Hayne on 4 February 2019 and all political parties will move quickly to finalise and announce their policies in this area in response to that report. Lander & Rogers' assessment of that report will be the subject of a separate publication.

Not unexpectedly, we should also see a strong pipeline of new investment opportunities for both domestic and foreign investors looking for opportunities because of the business line rationalisation now occurring as a result of the Royal Commission — major financial institutions are expected to look to divest non-core assets due to diminished risk appetites and renewed focus on their core business.

Affecting financial institutions more generally is Labor's proposed changes to the way that tax benefits apply to dividends, potentially adversely affecting investor reliance on dividends as an income source. The policy is to no longer allow taxpayers to receive cash refunds if they are getting tax breaks on dividends that already take their total tax bills to less than zero (that is, they lose the upside in fully franked dividends at a certain point). Touted to raise over A$11bn in 4 years for Government, this is expected to create headaches for major banks and other companies that are committed to paying fully franked dividends and for fund managers running share portfolios for their investors.

5. Immigration and visas

As outlined earlier in this article, the employer sponsored skilled worker visas (permanent and temporary) were changed in April 2018. The previous subclass 457 visa was replaced with the Temporary Skill Shortage subclass 482 visa. The changes reduced the categories of employees eligible to obtain visas, as well as the term of the 482 visa from four years to two years in many cases. The changes, and any future changes, have the potential to cause many difficulties for foreign companies. Japanese companies and employees have an advantage in relation to the 482 visa as a result of the Trade Agreement between Australia and Japan, the Japan-Australia Economic Partnership Agreement, as follows:

• A 482 visa can be granted for up to four years to those employees who would generally only be eligible for a two-year 482 visa.
• Labour market testing is not required in a number of cases including where the worker you nominate is:
  • a citizen of Japan; or
  • a current employee of your business including associated companies located in an ASEAN country.

Immigration and visas are a federal responsibility, so the next election will be decisive in this policy area. The Liberal-National coalition could look to cut the level of immigration in their policy. On the other hand, the Labor Party has shown no signs of favouring a smaller immigration intake, although ACTU policy on immigration is centred on their opposition to temporary work visas. At present, there are around one million people on such temporary work visas in Australia, something the ACTU regards as “shipping in exploitation". Therefore, if Labor wins the federal election in 2019, we can expect a further review of temporary work visas.

6. Real estate market

While the commercial and industrial sectors remain generally strong across the nation, underpinned by continuing foreign and domestic institutional demand and cheap debt, we are seeing some softening in retail sector asset values as digital disruption of that sector continues. Australia is experiencing a fall in house prices, particularly in the Sydney and Melbourne markets, which may continue for two or three years according to many real estate experts. The rise in land prices in recent years — caused by very low interest rates and a high level of immigration into Sydney and Melbourne — had caused house prices to become extreme, excluding many from being able to afford to enter the housing market. Politically, increased taxes and levies on foreign buyers, and continued capital export controls in China, will contribute to the slackening of demand.

Housing affordability remains a key concern for Australian residents, but current pricing trends and foreshadowed government policy changes are expected to continue to exert downward pressure on prices in this sector. Running counter to this trend is increased capital and lending restrictions from Australian financial institutions in response to the recent Financial Services Royal Commission and banking regulators.

The Labor Party has a policy to significantly reduce negative gearing concessions (permitting investment cost tax deductions) and capital gains tax discounts for real estate investments. If the Labor Party wins the next federal election, negative gearing will be permissible only for the purchase of newly constructed houses. This could conceivably increase demand for new residential properties, benefiting property developers in this market. We have seen similar policies in the past be overturned due to negative impacts on house prices and development activities, and uncertainty on the future of these policy measures may further challenge investment in the residential development sector.

7. Agriculture and food

The Coalition Government and the Labor opposition generally agree on food and agriculture policy. A key issue does surround the live exports of sheep and cattle, which is more contentious with the Green party and some NGO activists. Labor proposes to stop the northern summer sheep trade at the first possible opportunity (when temperatures are hottest and animal suffering the greatest), and to phase out all live sheep exports over time.

One of the key issues for the farming industry will be the impact of energy policy — reducing agricultural emissions of CO2 and other greenhouse gases could have a big cost impact on the beef and sheep meat sectors, and if this extends to soil management practices for cropping it could also raise production costs. The Paris Agreement covering greenhouse emissions is vague about how wide its impact will be in a country such as Australia. The most extreme scenario includes a large reduction in the national beef and sheep herd numbers, but this is unlikely to be introduced.

What next?

Australia has been historically known as a politically stable country with a strong 'rule of law', making it a desirable place for foreign investment. Over the last decade, however, Australia has had seven prime ministers and the traditional assumptions about Australian sovereign stability are being challenged.

Our team at Lander & Rogers can assist in planning for and implementing the strategies necessary to position or 'time' foreign investment activities. If you would like to discuss any issues that the forthcoming election may raise for you and your organisation, please get in touch with one of our team.