Funny Stuff

A “fairness” tax?

In Belgium they have a tax called a “fairness tax”. It is a 5.5% tax on dividends paid by certain companies – on top of corporate taxes paid.

Interestingly it is so “fair” that it is likely to be struck down in both the Belgium Supreme Court and the European Court of Justice.

So when does a “fairness tax” apply?

There has always been a problem with the fact that if you fund operations by debt you get deductions that you don’t get if you fund the operations with equity. So many countries, like Belgium, have an “Allowance for Corporate Equity”, or ACE as it is more commonly known. This is a tax deductions for using equity and is supposed to remove the tax difference between using debt and equity. Economists love these and get a run in every tax review (even got a run in the Henry Review final report).

After implementing an ACE the Belgium tax authorities found companies were claiming deductions for their equity – exactly as they were supposed to.

And this meant some of the company’s accounting profit was not subject to tax. And this profit, like any other profit, could be paid out as a dividend.

So to penalise corporates for doing what they were supposed to do under an ACE the Belgium government taxes dividends paid from untaxed profits at 5.5% – and they call this tax a “fairness tax”.

It appears in Belgium it is unfair to claim deductions that the tax laws specifically allow you to claim…

Funny Stuff

Uniting Church replacing the Australian Taxation Office

I have never thought that the Uniting Church would be competing with the Australian Taxation Office but now they are…

The Uniting Church has reportedly revealed it targeted international mining giant Glencore International with a private investigator to highlight the lack of transparency behind big multinationals.

According to The Australian Financial Review, the church said in a submission to the Senate committee inquiry into corporate tax avoidance that it had hired a former Australian Federal Police and AUSTRAC officer on a short-term contract to map Glencore’s structure in Australia.

The church’s Victorian social justice spokesman Mark Zirnsak told the newspaper Glencore had been in its sights for some time, but its investigation was “not a witch hunt”.

“We’ve been aware of concerns around them and allegations [over tax] keep coming up,” Mr Zirnsak said.

“There is a view that if a multinational company is suspected of tax dodging in one jurisdiction, it is worthy of examination as to whether that extends across other parts of their operation globally.”

Hopefully they are better at acting as a revenue collector than running a church. Try this for running a church into the ground.

According to the National Church Life Survey, attendance at Uniting churches dropped 11% from 1991 to 1996, 11% from 1996 to 2001 and 40% from 1991 to 2011.

So it looks like a trend of losing 11% every 5 years for 20 years.

The surveys show the Uniting church are losing attenders faster than any other church by a pretty far margin.

A church that had 250,000 attending in 1977 now has 97,000 and if the 20 year trend contines will be under 40,000 by 2050.

A church that is all but falling apart should probably think about where the spend its money wisely and not to employ “a former Australian Federal Police and AUSTRAC officer on a short-term contract to map Glencore’s structure in Australia.”

Perhaps leave that to the 23,259 employees (at June 2014) that the Australia Taxation office have.

By the way, in 2075 there will be more employees in the Australia Taxation Office than people who attend a Uniting Church

Income Tax Tax Policy

Is there massive corporate tax avoidance?

Following the most stupid report ever written by the Tax Justice Network, the parliament has decided to review our corporate tax system.

Having worked for some of these “evil” ASX listed companies, both internally and externally, I have never seen one of these companies bend the law without getting a ruling from the Commissioner first. Why?

Because the Commissioner is always dropping around. When I was the Tax Manager at Seven Network Limited I picked up the AFR to read we were buying Etihad Stadium (first I had heard). At 10:15 that morning the call from the guys at the tax office who reviewed everything that Seven did came in… “Can we catch up this afternoon to discuss the purchase?” I had to say can I at least get a copy of the agreement before we discuss the tax implications…

ASX companies do not hide things from the Commissioner! If there is unpaid corporate tax, either the Commissioner missed it in his review (my experience is ASX 50 every year or two this review happens), or the Commissioner is corrupt – and I am sure Chris Jordan is better at tax than I am and is beyond reproach.

This is politicians thinking corporate taxes work like their individual tax returns,which generally don’t get reviewed by the Commissioner.

ALSO… Company tax is not a real tax. Huh??? Company tax is more like a non final withholding tax – just like PAYGW. When you get your salary the employer takes some out for tax and this is a credit in your tax return. The company pays tax and when it pays a dividend the shareholder claims a credit for the company tax (imputation credits).

So if the company avoids tax, the shareholders pay more on their dividends.

And the company pay non resident withholding taxes if they pay a dividend to a non residents.

Yes, large companies don’t pay out all their profits as dividends to shareholders. But they pay most out to keep shareholders happy and those shareholders want the imputation credit that come from paying company tax.

The profits they don’t pay out are used to invest. And if those investment increase and are sold and the profits are paid out as dividends.

If you don’t think about it you can imagine “evil” ASX companies avoiding tax obligations but in reality the system drives these companies to pay company tax.

Let me end with an example… I worked for an ASX listed company who wanted to pay a dividend (as a part of an off market share buy back). In April I was asked what our franking balance was. In August I was asked again. In between these dates the Government changed the way franking balance were reported. Even though the amount of franking credits had not changed, the guys organising the buyback thought we could not pay a fully franked dividend. The CFO was furious! “Just pay more tax now as we need the franking credits” he yelled. I explained we did have enough franking credits to cover the dividend.

Does that sound like company tax avoidance?

Cases Planning Idea Planning Stuff

Part IVA and the Small Business CGT Concessions

I have been fearing this day for some time. A day when the Commissioner applies the general anti avoidance provision in Part IVA to a taxpayer who arranges a sale of a business to make the most of the Small Business CGT Concessions.

We all know how this is done. “Just before” the sale we make distributions to the owners that they put into super ($540k non concessional), or they renovate their house, or buy a ferrari – all assets excluded from the $6 million maximum net asset test. We also remember that we have not included liabilities for long service leave, or for the legal advice on the sale or the real estate agents commission for property sold with the business and we add these in… And hopefully we find we have maximum net assets of under $6million.

Picture 8

In the AAT decision of Track and Ors and Commissioner of Taxation ([2015] AATA 45) the taxpayer took these ideas one step further. They created a series of liabilities by declaring capital distributions. As the funds to pay these distributions were not available in the business (most of the value was in the goodwill) the business had to borrow money to pay these distributions – thereby adding liabilities and reducing the maximum net assets below the threshold.

But the question with any liability that we want to take into account in assessing the maximum net assets is does it relate to the assets of the business. If these liabilities relate to the assets in the business the taxpayer can use the small business CGT concessions. if not, they can’t use the concessions.

And this is where it all gets weird…

“The Track Bros 1 Trust lodged its 2006 income tax return on the footing that it satisfied the maximum net asset value test, thus enabling it to take the benefit of the concessions. It now contends to the contrary. It says that … the Trust’s liabilities … were not “related to” assets … . If these liabilities are excluded the net value of the CGT assets .., so it contends, is [greater than the maximum net asset threshold]. The Commissioner contends that each of those liabilities is related to assets … and that the net value of CGT assets was [less than the maximum net asset threshold]”

The taxpayer says they failed the Maximum Net Asset test and cannot claim the small business CGT concessions. The Commissioner says they pass the Maximum Net Asset test and can claim the small business CGT concessions. I have never seen it argued this way! Isn’t this the wrong way around? This is just weird.

Until you realise that the reason the taxpayer was trying to argue that the small business CGT concessions don’t apply was that the Commissioner was trying to apply Part IVA – the general anti avoidance provision. The Commissioner argued that the creation of the liabilities just before the CGT event of selling the business was a scheme undertaken for the dominant purpose of gaining a tax benefit. The taxpayer tried to argue there was no tax benefit as they had actually failed in structuring themselves to get into the small business CGT concessions – and they failed

Picture 1

The AAT found that the general anti avoidance provisions did apply as the taxpayer had been successful is structuring themselves just before the sale of the business to take advantage of the small business CGT concessions. And how many times have we done this?

It should be noted that the actions of the taxpayer to make sure they could claim the small business CGT concession were done very close to the sale time so it might be OK to set these things up well before a sale is contemplated – but if you do things just before the CGT event, the Commissioner might consider applying Part IVA… Ouch.

100% sure we will see this decision appealed. At least I hope we do.