Thursday, November 19, 2009

Thursday Column: What were they thinking? The tax heists that made us a nation of losers

How could our leaders have made changes designed to "better target and strengthen the application of capital gains tax" without seeing they would later allow companies associated with the misleadingly-named Texas Pacific Group to make a billion or dollars so in profit from the sale of Myer capital-gains-tax-free because they were registered not in somewhere like Texas but in the tax havens of Luxembourg and the Cayman Islands?

In his explanatory memorandum in 2006 the then Assistant Treasurer Peter Dutton said their cost to revenue was "expected to be $65 million per annum". His estimate was out, just a touch.

The whole thing's only come to light again because of the Tax Office's attempt last week to grab $452 million plus penalties it says the companies owe it after they banked $1.58 billion in proceeds and then withdrew almost the lot leaving just $45 in their Australian accounts...

The Tax Office has now made clear that it isn't after Capital Gains Tax. It can't be. The Dutton changes exempted the foreign owners of Australian companies from Capital Gains Tax in all cases other than those in which they traded real estate.

Labor acquiesced, although during the Senate inquiry it was prescient enough to ask whether the changes would really only cost $65 million per annum, noting they could cost much more, "especially in the event of a takeover bid for Coles".

Barnaby Joyce was one of the very few to point to the emperor's clothes.

"It is quite clear that not only are we are about to pass a piece of legislation that discriminates against Australians but we are doing it at the behest of other people in other corners of the globe," he told the Senate. "This legislation is going to be sneaked through. Do you know that today we have overseas equity firms that in the United States have put in a bid for Home Depot of $100 billion? They have the ability to remove $100 billion from the share market and the Labor Party is quite happy for that investment to be tax free."

Both parties were happy about it. They said other countries exempted foreign investors from Capital Gains Tax in the belief that they would pay it in their country of residence.

It seems not to have occurred to them that that country of residence could be somewhere like Luxenburg, without Capital Gains Tax. It occurred to Barnaby.

"I will give you one place. It is not very far away and people might have heard of it: New Zealand. New Zealand has no capital gains tax, so you can launch from New Zealand, come into Australia, buy up Coles, hold it for a year, sell Coles, put your money in your pocket, take it back to New Zealand and not pay one cent of tax - and that is something you are agreeing to today."

Why didn't our government instead set up a withholding tax refundable to the extent that Capital Gains Tax was paid elsewhere so that foreign investors at least faced the same sort of tax bills as Australians?

Because it wanted to "enhance Australia’s status as an attractive place for business and investment," as Minister Dutton put it. It enhanced it enough to bring us foreign equity owners of Channel Nine who seem to be in the process of destroying it, and a foreign equity bid for Qantas which might have gone down the same path had it not been narrowly rejected by Qantas shareholders.

It's not the only "what were they thinking?" moment being pondered by staff at the Henry Tax Review.

Another heist took place almost exactly ten years ago.

Under the cover of massive publicity for the impending Goods and Services Tax the Howard government set up a less-publicised inquiry into business taxation headed by the Prime Minister's friend John Ralph and included among his terms of reference one that was unusually specific, and it realated to personal, rather than business taxation.

Ralph was to examine "the scope for capping the rate of tax applying to capital gains for individuals to 30 per cent". Until then capital gains made by individuals had been taxed at their marginal tax, minus inflation.

Unlike the changes associated with the New Tax System which were vetted by the Treasury and accompanied by exhaustive analysis identifying which Australians would benefit, the change recommended by Ralph was accompanied by no such analysis and would not have passed muster in the tax division of the Treasury at the time.

The change, effectively a halving of the headline rate of Capital Gains Tax, benefited well-off individuals far more than any of the other more-rigorously examined changes introduced at the same time. Treasury tables show that the top 1 per cent of income earners make 39 per cent of the capital gains.

Ralph said the cut would lead to boom in investment in "innovative, high-growth companies".

Instead we rushed into real estate. It wasn't exactly the "better allocation of the nation's capital resources" he said he foresaw.

Labor was asleep and waved it through with only one dissenting voice, the then backbencher Mark Latham.

It would "add to the great Australian disease of asset and property speculation, particularly in our big cities", Latham told an uninterested Chamber. "It will take away resources from the knowledge economy and put them into the least productive, least honourable aspects of Australian economic activity."

He was right. Before the change Australian landlords actually made money. In 1999-2000 they pulled in a net $219 million from rent. By 2006-07 they were losing a net $5.37 billion.

Ralph - prodded by Howard - turned Australia into a nation of losers. He encouraged us to deliberately lose money in order to replace highly-taxed income with lightly-taxed capital gains.

As Macquarie Bank's Rory Robertson told his clients at the time, “since September 1999 it is almost as though the Australian tax system has been screaming at taxpayers to gear up to earn increased capital gains rather than to work harder to earn increased wages or salaries.”

It might not for much longer. Ken Henry is drafting his report.

Published in today's SMH and Age

Graphic: Adrenaline Zone

Related Posts

. What the hell were we allowing the foreign equity fund owners of Myer et al to do?

. Let's fix tax. Really.

. It's time to properly tax super, and the 50% discount for capital gains looks silly as well - Henry