Month: December 2013

Categories
Funny Stuff Income Tax Tax Policy

You think tax rates are bad in Australia?

Following the highest court in France upholding a 75% tax rate for incomes over €1 million, I started to look at whether I should start consulting in French… Un bagette merci…

First, the 75% tax rate is payable where a group of employers pays an employee over €1 million and is payable BY THE EMPLOYER! You have just signed a €10 million contract for your new CEO (or soccer star – some clubs have already gone on strike over this) and your cost of employing them just went from €10 million to £17 million (€10m + £9 x 75%). The employer has a contract it can’t get out of so it just has to cough up. To keep the football teams happy, the maximum amount an employer can pay is 5% of their turnover.

But the rest of the tax system is worse – primarily due to the fact that politically the French wont cut spending and as they have borrowed way too much the only answer is to tax and tax and tax some more.

As a headline, taxes account for 45% of GDP against 37% on average in OECD countries. Ouch. Almost half of all production taken back by the government.

Specifically, there is a 19.6% Goods and Services Tax equivalent (with only three exemptions – 7% rate for books and restaurant meals, 5.5% for most groceries and 2.1% to prescription drugs).

There is a wealth tax. It is actually called the socialist contribution wealth tax! This is different to a capital gains tax or death tax. It is a tax for owning to much stuff. If your net worth in greater than €800k you have a wealth tax to pay. If you get to over €16 million the rate can be at 1.5% of your wealth so you now know why billionaires don’t live in France. There are heaps of reductions here, like 30% of your home, professional property like a company you run an active business out of… But this raises almost no money – less than 2% of all tax – as there is also a tax shield law stopping an effective tax rate of greater that 50%. But the current government has removed this last year and so there were 8,000 households who had a tax payable for the year of greater than 100% of their income in that year.

There is also a inheritance tax. At its worst, if you send money to a non relative under a will it can be taxed at 60%, but even sending money or assets under a will to a spouse or kids get hit 5% above €150k, scaling up to 40% for large amounts.

Add to this company tax at 33.1%, individual income and capital gains rates similar to Australia, PLUS about 8% social security tax, land tax, stamp duties, a housing tax based on what type of house you live it whether you tent or own it – like local council rates.

So they have a high earners tax that applies to employers (had to have it apply to employers as the courts had said taxing the employees was unfairly harsh), a wealth tax and an inheritance tax…

And all this taxation leads to… Public debt of about 95% of GDP, growing by about 3% a year, and, as a result of losing their AAA status, spending €50 billion on interest payments.

“Advance Australia fair!”

Categories
Funny Stuff Tax Policy

Government operating at its best

Government operating at its best

After answering six months of letters to a Minister in the last government this is exactly what you come across every day…

Categories
Tax Policy

The middle class welfare myth

Solve all our economic problems by cutting middle class welfare! Anyone who says this has never thought any more about this than whether the slogan sounds good…

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The Facts

When people speak of middle class welfare, if they have any idea what they are talking about at all, they are generally talking about Family Tax Benefits and the Child Care Rebate/benefit (they must be so sad that the baby bonus is gone as they still complain about it today even though it does not exist).

The total cost a year of these two programs are:

– Just over $20 billion a year for Family Tax Benefit; and
– Just over $5 billion a year for the Child Care Rebate (see http://www.budget.gov.au/2013-14/content/bp1/html/bp1_bst6-01.htm).

$25 billion is a lot of money, but this represents everyone who gets benefits, not just those of the unworthy “middle class”. So how much of this is middle class.

For the largest part of the Family Tax Benefit by far, Part A, the amount payable is dependent on how many children you have and what your household income is. Once your family income is above $49,000 family tax benefit part A starts reducing. I don’t think a family income of $49,000 is middle class. Now the taper rate is very slow (specifically designed to avoid high effective marginal tax rates at certain income levels) but by the time the family income reaches about $100,000 family tax benefit part A is gone. As the average household income according to the ABS is $80,000 it would appear that little of Family Tax Benefit Part A is going to these sponging middle class.

Of the $20 billion in Family Tax Benefit cost most (say 75%) goes in Family Tax Benefit Part A and most of that goes to families earning the average income or less. So you could maybe save a billion or two by tightening the taper rate but not much more than that.

The remainder of the Family Tax Benefit, being Part B, is the much smaller amount that is only payable generally in single income families. So if the middle class family has two income earners (with the lower of the two earning more than about $26,000) there is no Family Tax Benefit part B. Also if the higher of the two earners earns greater than $150,000 there is no Family Tax benefit Part B at all.

So you can argue that single income families earning near, but not above, $150,000 should not get a government handout for their kids – but be honest that dropping the $150,000 threshold massively is unlikely to even raise you even $1 billion.

That leaves you with the child care rebate (I know I should say child care benefit but it does not sound as good). Again this has about a $150,000 threshold and starts to phase out when the family income is greater than about $42,000. As most households claiming this will be two income households these thresholds will ensure much of the benefit flows to lower income families. My best guess is you might save another $1 billion by tweaking the threshold and the phase out rate.

The Conclusion

So for all the screaming of middle class welfare, at the most aggressive you could save around $3 billion dollars… With a structural deficit of between $20 to $30 billion this is only going to put a very small dent it a very big problem… So lets start talking about real spending cuts… and for those talking about tax increases – https://taxrambling.com/2013/11/29/finding-extra-revenue-in-the-tax-system-where/

Categories
Cases Funny Stuff

What a great use of the Court’s time…

After the AAT and the Federal Court had a go, in November the High Court, the best jurisprudential minds, with combined experience of over a century, had a really useful challenge.

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The Administrative Appeals Tribunal and the Federal Court both (with the exception of Dodds-Streeton J) found that Sea Shepherd did not provide ‘short-term direct care animals without owners’ to whales.

They found this because:

– Short-term direct care requires provision of physical assistance, such as food, shelter or veterinary care to animals which require care of that nature. Sea Shepherd’s principal activity of protecting whales from harm does not constitute care of animals.

– Whales are not animals that would ordinarily be expected to have owners from whom they have subsequently become separated.

More info is at the Commissioner’s Decision Impact Statement at http://law.ato.gov.au/atolaw/view.htm?docid=%22LIT%2FICD%2FVID630of2012%2F00001%22.

But how cool is it that the greatest legal minds have had to work out if putting yourself between a harpoon and a whale is short term direct care? Even cooler is whether they have owners… Go Willy… Be free Willy…

Categories
GST Income Tax Legislation

Luxury cars and hire purchase

Most luxury cars are financed in some way or another – although a car salesman friend of mine says a man wanted to buy his $80,000 BMW with cash, real notes. Maybe the car was still financed in some way (like mafia financed…).

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But this does beg a tax question? Does the luxury car tax value for a car acquired under a hire purchase agreement include the consideration provided for the supply of credit under the agreement?

The answer seems an obvious NO. And the Commissioner agrees in Draft Luxury Car Tax determination LCTD 2013/D1. He state the finance does not effect the “price” of the car.

To quotes from the Explanatory Statement to the A New Tax System (Goods and Services Tax) Amendment Regulation 2012 (No. 1 ):

The amendments are not intended to affect the calculation of luxury car tax. In working out whether a car is a luxury car with respect to exceeding the luxury car tax threshold, only the price of the car is taken into account. The price includes GST and customs duty and does not include any luxury car tax, or any other Australian tax, fee or charge. The GST-inclusive price of the supply of credit is not relevant to the calculation.

The supply of the car and the supply of the credit continue to be treated as two separate supplies.

Categories
Tax Policy

Is Australia a high or a low taxed country?

High or low is a relative measure. So if we compare ourselves to the Saudis we are a high taxed country but if we compare ourselves to the scandinavians we are in easy street.

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The economist tell me we should compare ourselves to the OECD and when we do we are low taxed – http://www.oecd.org/tax/tax-revenues-continue-to-rise-across-the-oecd.htm.

The percentage of the tax take to GDP in Australia is 26.5% and across the OECD is 33.1%. Open and shut case? Maybe not.

When you look at the breakdown of what taxes make up these revenues one thing stands out.

Australia has higher income, profit, payroll and land taxes. Also, its indirect taxes are similar (10% v 7%). So how can Australia have a higher tax to GDP rate? The only tax, that makes almost all of the difference between Australia and the OECD is social security taxes. Of the 33.1% for the OECD, 9.1% is social security taxes. In Australia’s 26.5% there are no social security taxes.

And we know why. The Australian government decided that rather than collecting taxes to pay pensions they decided to force us to save for our own. Now just because OECD governments say they will use these social security taxes for social security payments (the nerdy term is hypotheticated taxes) does not mean they will – but if you took out these taxes Australia stars to look like a heavily taxed country (OECD 24% to Australia 26.1%).

But social security taxes are used for both unemployment and retirement assistance so you can’t say it is all covered by the Australian Super Guarantee system. If we assume 2.1% of the 9.1% is for things like unemployment (made up by me to get an answer) then Australia is exactly the same as the OECD average.

So is Australia a high or low taxed jurisdiction? NO. It is just right. So can we get on with cutting expenditure soon…

Categories
Super

Asset allocation in an SMSF

I spend a lot of time with financial planners – normally at conferences where planners often have a cleansing ale or seven… And they always ask what I am investing in personally.Why do they think a tax nerd knows anything about asset allocation…

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But i like to pretend I don’t put it all in listed banks and tell them this…

Each quarter the Commissioner releases a summary of SMSFs and in it he gives the average asset allocation for SMSFs – http://www.ato.gov.au/Super/Self-managed-super-funds/In-detail/Statistics/Annual-reports/Self-managed-superannuation-funds–A-statistical-overview-2011-2012/?default=&page=41#Table_15__SMSF_asset_allocations__2012_

This tells us the following allocation is the average:

33% cash and fixed interest
29% listed shares
12% commercial property
8.5% unlisted trusts
4.3% other managed investments
3.6% residential property
3.5% listed trusts

So i say 1/3rd cash, 1/3rd listed shares, 1/6th property and 1/6th trusts… And i spent a year studying applied finance… What ever they say after this I say “that’s not the general allocation” and then i get back to my beer…

Categories
Income Tax Legislation

A quick lesson in statutory interpretation from the Commissioner…

I can’t believe I just wrote this heading given I just won an AAT case (they conceded) that trust beneficiaries are taxed on present entitlements and not payment… I am not kidding, they denied interest deductions for a year as there was no payment only a present entitlement.

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But in draft Taxation Ruling TR2013/D8 – http://law.ato.gov.au/pdf/pbr/tr2013-d008.pdf – the Commissioner reminds us of the basics of statutory interpretation.

Section 23AH is a great little section that treats certain foreign branch income derived directly or indirectly by Australian resident companies as non-assessable non-exempt. It provides similar rules for foreign branch capital gains.

To be eligible for this the relevant income of the branch must be derived by a company that is carrying on a business at or through a permanent establishment -a PE. So we need both a business and a PE.

As the meaning of permanent establishment in subsection 6(1) and in Australia’s tax treaties is a place of business at or through which a person carries on a business, you would think that every time you have a PE you must have a business. So perhaps all you really need for 23AH to apply is a PE???

But, in addition to this general meaning, both the domestic law and the tax treaties also list specific cases that come within the definition. In particular, most of Australia’s tax treaties include a provision corresponding to paragraph (b) of the definition of ‘permanent establishment’ in the domestic law, that is ‘a place where the person has, is using or installing substantial equipment or substantial machinery’. So even if you are not carrying on a business you can still be a PE if you have substantial equipment or substantial machinery.

And here is the lesson… The PE rules don’t deem “having substantial equipment” to be carrying on a business. The PE rules deem having substantial equipment” to being a PE. And this is the classic statutory interpretation problem – taking a deeming to far… Let me put it mathematically…

If business then PE
If substantial equipment then PE

But these two do not mean substantial equipment means business!!!

So the Draft Ruling concludes that if you have a PE solely as a result of substantial equipment and not due to carrying on a business, you can not apply section 23AH – unless there is a specific article in the double tax agreement that deems an entity with substantial equipment to be carrying on a business, which is in a few DTAs…Here endth the lesson.

Categories
Legislation Tax Policy

Announced but unenacted… a bit of clarity

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In November the government announced (see http://axs.ministers.treasury.gov.au/media-release/003-2013/) it was not going ahead with caping self education deduction (limiting section 8-1 makes no sense), limiting the tax exemption on super pensions (impossible to calculate), removing section 25-90 (let the big end of town suffer) and repealing the statutory rate (pure politics in this – this is a concession that just has to go now that we will make no cars in Australia – see https://taxrambling.com/2013/12/11/another-go-at-closing-salary-packaged-cars/). They annouced they would go ahead with phasing out the net medical expense offset (see https://taxrambling.com/2013/12/13/net-medical-expense-offset-gone-kind-of/) and but a withholding event on capital gains (see https://taxrambling.com/2013/12/10/another-ridiculous-tax-policy-supported-by-every-side/).

Well they have finalised the list of what they are and are not going to do (see http://axs.ministers.treasury.gov.au/media-release/008-2013/) and these are the highlights…

Going ahead

  • Re‑states and clarifies the “in Australia” special conditions for income tax exempt entities and deductible gift recipients to ensure that the relevant entities operate principally in Australia. Every DGR needs to review where they do their activities…
  • Treats earn out payments as part of the value of the business asset for CGT purposes. This just means earn outs work with the Division 152 Small Business CGT Concessions…
  • Treats an investor in an instalment warrant as the owner of the underlying asset for tax purposes. Everyone did it this way so there is no real change here…
  • Replaces the GST free concessions for the supply of going concerns and farm land supplied for farming with a reverse charge mechanism. This will kill all those crazy GST ideas – most of which ignore Division 135 or changes made to the margin scheme in 2007. This is a very good idea…
  • Introduces penalties for promoting schemes designed to obtain the illegal release of superannuation benefits. This also gives the ATO flexible and cost‑effective penalty options to deal with SMSFs that breach the law. These were in a Bill before the last election so should come back very soon…
  • Amend the “connected with Australia” rules in the GST Act to reduce the number of non‑residents who are “unnecessarily” drawn into Australia’s GST system… lets see what they actually do here…

Not going ahead

  • Allows the R&D refundable tax offset to be provided in quarterly instalments. Waste of breath…
  • Ensures that if a lender claims a deduction for writing off a debt, then the borrower would recognise a similar amount of income.
  • The Government will not proceed with the measure to ‘better target’ not-for-profit tax concessions at this stage, but will explore simpler alternatives to address the risks to revenue.
  • Ensures that trust deed clauses cannot be used to prevent excess amounts from being counted as contributions.
  • GST change of use, vouchers, tri partite arrangement and a series of other changes. It looks like the Board of Tax review of GST was not overly well received as it only got one main change up – Reverse charged going concerns.
  • Prescribes rules for the acquisition and disposal of certain assets between SMSFs and related parties.
  • Makes rollovers to SMSFs a ‘designated service’ under the Anti‑Money Laundering and Counter‑Terrorism Financing Act 2006, requiring super funds to introduce additional checks and safeguards.
  • Requires funds to notify members whether contributions have been received, either quarterly or six monthly (to alert members about unpaid superannuation).
  • Implements the recommendations of the Board of Taxation’s 2008 report on modifying the  taxation treatment of off‑market share buy backs.

So it looks like not much exciting is going to change. Reverse charging supplies of going concerns is a classy idea. We are already acting like the earn out and instalment warrant stuff is law. The Super penalties were already law so we were ready for them…

I hope the guys in the treasury who draft the laws have something to do in their spare time as the 92 announcements they are working on just dropped to 34 and some of these (six by my count) are already drafted…

Categories
Cases

Federal Court v High Court… Battle lines drawn

I was going to write a blog on the tax High Court decisions in 2013, but I started to notice a trend, and a worrying trend at that.

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In the Unit Trend case the High Court overturned a Federal Court decision that the GST anti avoidance rules in Division 165 did not apply. The facts were that a taxpayer put in a GST group and had transactions in the group to reduce GST payable by tens of millions of dollars. In my opinion this was certainly a situation that Division 165 applied to but the Federal Court took a very technical view and let the taxpayer off (this was just a choice and not a scheme…). Fortunately the High Court made a sensible decision.

In the Consolidated Media case the High Court overturned a Federal Court decision that no capital gain arose in relation to an off market share buyback. The facts were that the taxpayer wanted to do an off market share buy back and wanted as much as they could be treated as a franked dividend rather than a capital gain. Therefore, they created a new account called a “share buy back account”, funded by share capital, and argued that as the buy back did not come directly from share capital, even though the new account was just a share capital account by another name. The Federal Court accepted this technical argument, but fortunately the High Court made a sensible decision.

In the Qantas case the High Court overturned a Federal Court decision that there was no supply made by Qantas to people who do not turn up for their flights and so there is no GST payable on the amount paid. Of course there is a supply whether or not you turn up by the Federal Court took a very technical review of the carriage contract, but fortunately the High Court made a sensible decision.

In the Bargwanna case the High Court overturned a Federal Court decision that a trust met the rules to be a charity under Division 50 even though the case in the charity was used to offset a private home loan by a high wealth related party. The Federal Court came it its conclusion through a very technical review of the rules of what the funds of a charity can be used for, but fortunately the High Court made a sensible decision.

In the Mills case the High Court overturned a Federal Court decision that the imputation streaming provisions in Part IVA apply… Do I really need to say this but guess who made a decision based on technical arguments and guess who made the sensible decision.

And, apart from whether the Mining Tax was unconstitutional, this is all the tax cases the High Court has considered in the last two year. And in every case the Federal Court (apart from Edmonds J in the Mills case) has had to be put in its place. It appears the Federal Court keeps missing the forest for the trees. Fortunately, the High Court seems to keep an eye