Funny Stuff

Fairfax at it again

The report will I think make it almost impossible politically for this government to sell its austerity program or its GST “reform” proposals. The mantra that Australia has a spending problem, not a revenue problem, looks hollow in the light of the low tax contribution from big business.

And so Fairfax runs the same argument it has all through the holidays. The fact that 30% of large companies paid no company tax in 2014/15, means we don’t need to pursue any revenue or spending reform. We can just raise all the revenue we need to cover the $35 billion yearly deficit (closer to $50 billion if we include the States and Territories).

They are forced to admit…

Some will have an innocent explanation

But that still not going to stop Fairfax’s crusade to avoid any spending restraint or real tax reform.

But lets think this through? If there are a large number of companies not paying the tax they owe, then what has the Commissioner been doing? He has the power to access all of the financial information of these organisations (more powers than the police have) and would already know if there is an innocent explanation for each of these companies.

So if there is no innocent explanation, and the Commissioner has not issued additional assessments on these taxpayer, then the only conclusion is he is either incompetent or corrupt. So does Fairfax think the Commissioner is corrupt or incompetent?

I know most of the senior staff at the ATO and they are some of the smartest people I know. More importantly they are the most ethical people I have met!

But back to Fairfax. The journalist know all this and they know there is no story if they concede this. So they try to argument that the Commissioner needs more resources (which he specifically denies he does), that there needs to be more public disclosure (the Commissioner already has all the information and the broadest access powers of any government agency), or that certain “big business concessions” need to be removed. For example:

Foreign tax offsets (tax credits), imputation offsets and research and development offsets might be part of the explanation. That however just raises a question as to whether such offsets (and special deductions and exemptions businesses may get) are good policy.

Removing foreign tax credits means that Australian companies that invest overseas should pay tax in the other country and tax in Australia on the same amount. 35% US corporate tax and then another 30% Australian tax – how stupid.

Removing imputation means that if the subsidiary company earns income and pays it up to the head company of the group the tax rate is now 60% – how stupid. Worse still, ever suggestion to remove imputation is linked to a massive reduction on the company tax rate which will decrease the company tax take from inbound multinationals!

So with their argument causing anyone who knows the smallest thing about tax to start laughing or crying (Rob Heffernan, who is the head of Tax Policy in the Federal Treasury did actually chuckle when he was last called before the Senate to be asked about why certain companies are paying so little tax), they try their last argument…

Google also appears to have “diverted” much of its Australian source income to Singapore. It is easy to do. When Australians contract with Google to put ads on the site, we contract with a Singapore entity. In general terms, under the tax treaty with Singapore, that country then has the taxing rights over that income because it isn’t associated with the Australian entity.

This entire argument relies on the journalist ignoring the network of world wide tax treaties, and that there are more countries other than Australia in the world.

First the treaties. These treaties are pretty much the same all over the world and they all decide which country gets the taxing rights over what income. They say that income is taxed out of the “permanent establishment” from which it is derived. Selling advertising on a website is obviously not derived where the customer who wants something advertised is. But it is where the advertiser runs their operations. So Google has not diverted any income at all, they have just applied the tax treaties correctly.

At this point people scream that we should change the tax treaties so the income is taxed where the customer is? Do you really want all of BHP’s tax to be paid overseas and none in Australia as most of its products are sold overseas? No mining or resources companies paying any tax in Australia? You can’t have it both ways. Changing the treaties to tax based on the location of the customer would bankrupt Australia overnight as there would be no tax on any of our exporters (and the rest of the world is not going to agree anyway).

Second, let remember there are other countries in the world other than Australia. All the Google entities in the world are owned by a US company. And when Google wants to buy its next $1 billion acquisition, it repatriates some of its global income to do this back to the US. When it does this, the repatriated amount is taxed at 35% (US company tax rate) less the tax paid in the foreign country.

So if Australia wants to start taxing all of Googles advertising revenue paid by Australian customers (ignoring the treaties) then when Google bring the cash back to the US instead of getting 23% tax (25% US tax less 12% Singapore tax) they will get 5% tax (35% US tax less 30% Australian tax).

Earlier this year, the Secretary of the US Treasury called Joe Hockey. He was concerned that it looked like Australia was considering “stealing” the future tax payments that the US Treasury has already budgeted for. And “stealing” is the right word, as it is contrary to the signed US / Australia double tax treaty.

I think that the public finances in Australia are broken. And I think we need BOTH spending reform and tax reform. But until Fairfax stop lying to the Australian public that this problem can be solved by corporate tax reforms, no one will listen to any idea on how to solve the real problem.

And here is the real problem. Go read the article linked above. And then laugh or cry that it was written for Fairfax by a former assistant commissioner of taxation in the Australian Tax Office. When arguments as weak as this are peddled by people with reliable CVs, what hope do we have.

Tax Policy

Arrr, the Greens

The Greens have done it again. When you put out a press release titled “Axing just 4 unfair tax breaks would plug Budget revenue hole” you are going to get me excited. With a yearly budget deficit of $35-40 billion I was desperate to see what 4 tax breaks can raise this amount each year.

But it is a Greens press release so according to the Greens the “Budget revenue hole” is the additional amounts that will be added to these already massive yearly deficits when the MYEFO is released this week. So they are not fixing the $35-40 billion problem, just the growth in the $35-40 billion problem!!!

But in case you are interested in what they are proposing here are their 4 ideas.

  1. Progressive superannuation taxation to replace the 15 per cent flat tax rate on pre-tax superannuation contributions from 1 July 2016. Earn less than $18,200 and your fund pays no tax, earn over $150,000 and your fund pays 30% tax (with a 4%, 15% and 22% rate in between)
  2. The removal of the capital gains tax discount for all capital gains realised on or after 14 December 2015 (but go back to indexation)
  3. Remove negative gearing for assets purchased from 14 December 2015
  4. Remove fuel tax credits (FTCs) for all industries except agriculture and other mining and coal related stuff

Lets be honest, these are massive changes… BUT THEY STILL ONLY KEEP US LOSING $35-40 billion a year!


Income Tax Legislation Planning Stuff Tax Policy

Innovation Tax Changes

Why does “innovation” have anything to do with tax changes? In the Government’s Innovation Statement most of the expenditure is making tax changes.

Tax is a revenue raising device… Not a method to change people’s actions. When you use tax policy to do anything other than raise revenue you get bad policy.

But here are the changes announced.

The “same business test” becomes the “predominantly similar business test”. This means you can still get to the losses if the business uses similar assets and generates income from similar sources. Let the loss trading begin!

Taxpayers will now be able to self-assess the tax effective life of acquired intangible assets that are currently fixed by statute. So instead of having to depreciate a patent over 20 years or in house software over 5, a taxpayer can now self assess its life.

Are you excited yet???

Early Stage Venture Capital Limited Partnerships (stay away as these are messy) will be able to get a10% non-refundable tax offset on capital invested. These partnerships can also get bigger than the current law allows before having to wind up.

Wake me up…

Lastly, certain investors will get a 20% non-refundable tax offset on investments (capped at $200,000 per investor per year) and a 10 year exemption on capital gains tax, provided investments are held for three years. Now this sounds more exciting. So what can I invest in to get these benefits?

The Government has not decided yet…. ARRRRAAAAHHHH. All we know is that these company must have been incorporated during the last three income years, not listed on any stock exchange and have expenditure and income of less than $1 million and $200,000. But in addition to this the company must be undertaking eligible activities – and no one knows what these are. This is just a perfect example of the marking coming before the policy!

Lets talk in 2016 about this

GST Legislation

GST for non-residents made easy

It has been out for a while, but there is some draft law that proposes big changes to GST.

The first part of the draft Tax Laws Amendment (GST treatment of Cross-Border Transactions) Bill is exactly as we expected… The government will impose GST on offshore intangible supplies to Australian consumers from 1 July 2017.

But the second half of the Bill proposes a series of changes to the “connected to Australia” rules in the GST Act. And if these changes are implemented there will be a massive drop in the number of non-resident suppliers in cross-border business-to-business arrangements that must apply the GST system. But the draft Bill has not start date yet so don’t get to excited…

This draft Bill does three interesting things for non-residents:

First, the draft Bill creates a new type of supply, which is specifically made not connected with Australia. This is a supply made by a supplier who is a non-resident, that is not be made through an enterprise that the supplier carries on in Australia, and the recipient of the supply must be registered, must be carrying on an enterprise in Australia and must not acquire the thing solely for a private or domestic purpose.

Put simply, non-residents who don’t have an enterprise in Australia that only transact business to business will find that they no longer have GST obligations.

Second, the current GST Act uses the income tax definition of “permanent establishment” to establish if there is an enterprise carried on in Australia. The new rule proposed by this draft Bill will be that an enterprise of an entity will be carried on in Australia if the enterprise is carried on by particular individuals who are in Australia and either, the enterprise is carried on through a fixed place in Australia, or the enterprise of the entity is carried on, or is intended to be carried on, through one or more places in Australia for more than 183 days in a 12-month period.

Third, the draft Bill states that GST-free supplies made by a non-resident supplier will not be counted towards the turnover test so they will only need to assess if their taxable supplies are greater than $75,000 to see if they need to register for GST.






Legislation Tax Policy

What are we waiting for…

Each December I try to wrap up the year with the tax promises that have not quite made it into law. While the list has VERY, VERY SLOWLY, getting shorter, there are still a number of measures that are yet to get in to the tax laws.

And remember, after the last election, this Government promised it would be different to the previous Government (heard that before) and not leave announced measures unenacted.

So here is the list:

Announcements sitting in Bills before the Parliament

Draft law in the public for consultation

And the stuff that is announced but nothing has been done other than an announcement

  • Innovation statement stuff – OK it was only announce in December
  • No low value GST threshold – GST changes are always is slow as each State and Territory has to have a go at it
  • Amendments the tax hedging rules
  • Functional currency rules — extending the range of entities that can use a functional currency
  • Debt/equity tax rules — limiting scope of integrity rule
  • Taxation of financial arrangements — foreign currency regulations — technical and compliance cost savings amendments

That is not a very long list. But there is an election coming so lets see what tax policies come up.

Income Tax Tax Policy

What a waste of time

It is stupid tax policy made worse…

From 1 July 2016 there will be a 10% non-final withholding tax on payments made to foreign residents that dispose of certain  property. The effect of this will be that where a foreign resident disposes of Australian property, the purchaser will be required to withhold and pay to the Australian Taxation Office 10% of the proceeds from the sale.

The reason they are implementing this is to stop non residents from just not paying any CGT on these sales. To do this we force the purchaser, not the non resident seller, to undertake the withholding.

There are a number of exclusions. But the most important is that the new withholding regime will not apply to real property transactions valued under $2 million.

Because we all said that “if a non resident is happy to not pay tax, they will also be happy to pretend they are residents to avoid this withholding” the Government has now come up with another solution… Clearance Certificates.

These certificates confirm that the withholding tax is not to be withheld from the transaction and the Government has decided that, for real property transactions valued above $2 million, the purchaser must withhold 10% of the purchase price unless the vendor shows the purchaser a clearance certificate from the ATO.

So now everyone, including residents, will have to get one of these certificates if they want to sell property greater than $2 million.

So let me get this right…

Because naughty non residents were not paying their CGT on the sale of properties… Resident sellers now have to get a clearance certificate (non- residents won’t get one because they cannot)… and resident buyers have to keep watch to see if they have to withhold 10% – and if they don’t they will still owe 10%.

To stop non residents doing naughty things, residents are given substantial extra administration.

Good policy!