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Recent Media

This section provides a selection of media items posted in the last seven days on issues within TaxWatch’s area of interest. Items of longer-term interest will then be transferred to the monthly archives and may also be filed under he relevant topic in the Tax Policy collection.


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Trump tax cut a threat to investment: Joyce

Annabel Hepworth, The Australian, 19 October 2017

Australia is falling behind as Donald Trump proposes to slash the US corporate tax rate, a threat to local investment, Qantas boss Alan Joyce has warned. Mr Joyce, who is also on the board of the Business Council of Australia, pointed to warnings by the nation’s peak business group that the Trump administration’s plan would suck investment dollars away from places like Australia. “Which is clearly what happens when you get huge differentials like this, because people will make decisions based on the returns that they are going to get and investment returns from US companies improves compared to Australia and Australian investments,” Mr Joyce told The Australian this week, during a flight taking Qantas’ first Dreamliner from Seattle to Sydney. “And multinationals will make that decision. And that’s clear. “I think everybody that is an economist, anybody that looks at it clearly knows they will make less capital investment in Australia if the differential continues.” He said that different tax rates “make investors look at business cases differently”. In the US, Mr Trump has announced plans to cut the federal rate from 35 per cent to 20 per cent. The BCA has argued it is crucial to cut Australia’s company tax rate to attract foreign investment, although this was challenged this week by Reserve Bank assistant governor Luci Ellis, who said that if Australia could not attract foreign capital with its current environment the exchange rate would fall, making Australia more competitive. Business has been pushing parliament to cut the company tax rate. It has been citing Treasury estimates that cutting the company tax rate to 25 per cent would boost GDP by $17 billion a year. Treasurer Scott Morrison has also pointed to the US plan to argue the case for tax reform. Yesterday the House of Representatives was set to resume debate over extending company tax cuts to all companies. In March, the Senate agreed to gradually reduce the company tax rate for businesses to 25 per cent in 2026-27, but this was confined to businesses with a yearly turnover of up to $50 million. Top

BHP labelled Australia's 'worst tax dodger' by former treasurer Wayne Swan

Adam Gartrell, The Sydney Morning Herald, 19 October 2017

Former treasurer Wayne Swan has launched another extraordinary attack on mining giant BHP, labelling it Australia's "worst tax dodger" and linking a million dollar bonus to the company's CEO to his success at minimising tax. Under the cover of parliamentary privilege, Mr Swan called BHP "a fiscal termite eating away at the foundations of our corporate tax system" and rubbished the company's claims to be a global leader in tax transparency and corporate responsibility. The world's biggest miner has been in a long-running dispute with the Australian Tax Office over assessments spanning 11 years that total $661 million in primary tax, plus interest and penalties that take it to more than $1 billion. Under dispute is the margin on mark-ups on commodities sold to its Singapore marketing business, which many argue is a ploy to avoid tax in Australia. BHP strongly denies this accusation. But Mr Swan said the BHP dispute accounted for a quarter of the ATO's total $4 billion total corporate tax disputes, and accused the company of "pillaging the Australian Treasury and short-changing the Australian people, pure and simple". The backbench Labor MP - who clashed with the resources sector over his failed mining tax - also took aim at the company's "self-righteous" leadership, claiming chief executive Andrew Mackenzie's latest million dollar bonus was linked to tax evasion. Tax representation is listed as one of Mr Mackenzie's performance indicators in the company's 2017 annual report. "In essence, BHP's board have awarded their CEO a million dollar bonus for a billion dollars avoided in tax," Mr Swan said. "A million dollar bonus for organising aggressive tax minimisation through a tax haven resulting in one of the largest tax disputes in Australian history. A million dollar bonus for enhancing transparency and tax reputation when the company's current tax affairs can only be described as a high farce." BHP declined to comment on Mr Swan's speech but a company source dismissed his claims around executive remuneration as ridiculous. In its latest economic contribution report the company described its dispute with the ATO as "complex". "BHP does not agree with the ATO's position. Consequently, we have objected to all of the amended assessments and intend to continue to defend our position, including by initiating court action if necessary," it said. BHP said it has paid $66 billion in taxes and royalties to Australian governments in the past decade. It paid a corporate effective tax rate of 34.5 per cent in 2017, higher than the general corporate rate of 30 per cent. Once royalties are included, the rate increases to 46 per cent. Mr Swan made the claims during a debate on the government's next tranche of company tax cuts, which he said was part of the "toxic foreign import" of trickle-down economics. Top

Australians are giving less to charity. Here's why

Matt Wade, The Sydney Morning Herald, 18 October 2017 Each year the taxman delivers a revealing appraisal of Australia's generosity. Deep within a report titled Taxation Statistics are details of the deductions individual taxpayers claim for charitable donations. It doesn't cover every contribution made to good causes, of course. But its a rigorous insight into the nation's altruism. Here are fivetrends inAustralia's giving to charity revealed by the ATO's latest assessment. 1) Individuals don't give away a very big share of income Analysis of the latest tax data by Queensland University of Technology's Centre for Philanthropy and Nonprofit Studies shows tax-deductible donations made by individuals climbed to a record high of $3.1 billion in 2014-15. But the share of income being donated is less impressive. On average, individual taxpayers who made tax-deductible donations gave just 0.4 per cent of their taxable income. That share was up a little on the previous year but still lower than before the 2008-09 global financial crisis. And even that figure has probably been boosted by improved record keeping rather than generosity, said the QUT report author, Professor Myles McGregor-Lowndes. "I've got a strong suspicion that people are becoming better at retaining tax deductible receipts so they can claim them on tax," he said. A trend for employees to make donations through their workplace payroll and for big charities to email donors end of year statements has made is it much easier to claim deductions. Even so, only about a third of the taxpaying population claimed a tax-deductible donation according to a study in 2014-15. 2) Charities depend heavily on the super rich An elite group of just 6600 taxpayers with taxable incomes above the $1 million mark made more than a fifth of all tax-deductible donations in 2014-15. "Wealthier people have more discretion to give," says McGregor-Lowndes. But giving by those on high incomes – $180,000 a year or more – is much more sensitive to stock market gyrations and economic shocks than for others. Tax-deductible claims by the wealthy slumped during in the wake of the global financial crisis and took some years to recover. The Melbourne suburb of Toorak-Hawksburn made tax-deductible gifts worth more than $100 million in 2014-15, the highest in the country. Although taxpayers in NSW made the largest average donations of $836. 3) Even so, the rich don't necessarily donate the biggest share of their incomes When it comes to the proportion of income that people give away, middle- and low-income neighbourhoods often outshine wealthy ones. The National Australia Bank's charitable giving index, which tracks donations made electronically, shows those donating the biggest share of their income tend to come from suburbs with modest incomes. The South Australian suburb of Sturt, with an average income of just over $47,000, gave the highest proportion of income on average in year to February, NAB's data shows. One mystery in the latest tax figures is that about 40 per cent of those with a taxable income over $1 million claimed no tax deduction donations whatsoever in 2014-15. "Its gob smacking to me that you'd have an income of a million dollars and you don't claim anything," said McGregor-Lowndes. "These are sorts of people who tend to keep their receipts or have someone to keep them for them." 4) Some occupations stand out Ministers of religion claimed an average of 2.2 per cent of their taxable income as gifts – the highest rank proportion of any occupation. Mcgregor-Lowndes puts this down to the need for them to set an example to others. "It is very difficult to tell your congregation to tithe or to make a periodic donation if you are not doing so yourself," he said. The occupation with the biggest share claiming charitable tax deductions were police and other emergency service workers (73 per cent). The tax data shows that women gave away slightly bigger proportion of their taxable income than men, although men gave more overall. It also shows those aged over 65 years donate much more than all other age groups. Even though the share of Australians who claim no religious affiliation is on the rise, giving to religious organisations remains popular. The 2016 Giving Australia Project, which surveyed Australians about all charitable giving (not just tax deductible donations), found more was donated to religious organisations than any other cause. 5) There are signs we are finding it harder to be generous The increase in tax deductible donations revealed in the 2014-15 tax figures was driven by the contributions of high-income earners. The difference between the average donation and the median donation tells the story. The average individual tax deduction jumped 17 per cent to $674 but the median, or middle, donation rose just 5 per cent to $105. This suggests sluggish wages growth and subdued consumer confidence are taking a toll on charitable giving. NAB's charitable giving index showed giving in Australia fell by 1 per cent in the year to February. That compares with an increase of 6 per cent in the previous year and growth of about 10 per cent back in 2013. Australia also slipped several rankings in the 2017 World Giving Index, published last month by the UK-based Charities Aid Foundation. Australia still ranks among the top 10 countries on the index, which compares nations according to the share of population that help strangers, donate money, and volunteer time. But the research revealed a sharp drop in the proportion of Australians donating money to charity. Top

Web of Australian Adani solar companies leads to offshore tax havens

Joshua Robertson, The Guardian, 18 October 2017

Adani has spread its use of offshore tax havens to its Australian solar projects, providing another avenue that could allow the wealthy Indian family behind the transnational to legally minimise tax paid on income from local operations. Six companies linked to Adani’s renewables business, which chairman Gautam Adani wants to make the biggest in Australia by 2022, were registered with the Australian Securities and Investments Commission on 3 August. The companies all have Australian-based Adani executives as directors. But they fall into two groups – three companies in each – which follow a markedly different path to their ultimate owners. One trail leads back to Adani Enterprises, the stockmarket-listed company in India which is vying to build Australia’s largest coalmine, and in which the Adani family are the major shareholders. The other bypasses the public company in India entirely, leading back to the Adani family via privately owned companies based in the Cayman and British Virgin islands, recognised tax havens. The companies were registered a month before the energy giant said it would proceed with “one of the world’s most advanced solar energy plants” at Rugby Run near Moranbah, the largest of three plants Adani proposes in central Queensland and South Australia. Gautam Adani trumpeted the group’s Australian solar ambitions when announcing a power purchasing agreement for Rugby Run with an unnamed but “significant power retailer”. “We are the largest generator of solar energy in India and we aim to replicate that in Australia,” he said. Adani bought Rugby Run – a former cattle property once earmarked as a rail thoroughfare for transporting coal from its contentious Carmichael mine – for $1 on 9 June last year from Queensland beef barons the Acton family, transfer documents show. The site gives its name to one of three companies that signal the start of the tax haven trail from the Australian solar business: Adani Rugby Run Operations Pty Ltd, Adani Renewable Operations Pty Ltd and Adani Renewable Operations Holdings Pty Ltd. All three companies have a parent company in Singapore, Global Renewable Energy Holding Pte Ltd, which was incorporated in January with Vinod Shantilal Adani as sole director. Singapore company filings show Global Renewable Energy Holding Pte Ltd is owned by Atulya Resources Ltd in the Cayman Islands. Atulya Resources is in turn owned by ARFT Holding Ltd in the British Virgin Islands. Documents held by the Singapore corporate regulator disclose that “the Adani Family” is an ultimate shareholder of ARFT Holding Ltd. Back in Australia, the other three companies registered in August were Adani Renewable Assets, Adani Renewable Asset Holdings and Adani Rugby Run. They are held by Adani Global Pte Ltd in Singapore, which is held by Adani Global Ltd in Mauritius, in turn owned by the public company Adani Enterprises Ltd in India. Adam Walters, the principal researcher for Energy Resource Insights, who uncovered the new tax haven links, said Adani’s use of tax havens and parallel company structures was entirely legal. But he said they could enable the Adani family to generate income from operating the solar farms, via agreements with the public Indian parent company that owned the assets. These profits could then be channelled to the Adani family via the Cayman and British Virgin islands, which would have favourable tax implications for them, Walters said. “Rather than benefit because of their shareholdings in listed companies in India where they have to pay lots of tax, they could benefit via the British Virgin Islands,” he said. “What could well be the case is the listed companies have got the money behind them, they can build the things, but then the profits can be generated in the family-owned businesses.” Walters said this was a pattern suggested elsewhere in Adani’s corporate structures around Australian mine and rail projects. It arose when Adani Mining had an opportunity to dispose of a future liability worth billions, in the form of a $2 a tonne royalty deed held by the original owner of the Carmichael mine site, Linc Energy. When a distressed Linc agreed to offload the deed for $150m in 2014, it was not Adani Mining that bought it. Instead, Adani Mining lent $150m to an Adani family-held trust, linked to the rail project, to snap it up. “This means that the family could potentially receive over a billion dollars in the Caribbean even if the mine is unprofitable in Australia,” Walters said. “Adani Mining, rather than spending $150m, now have an IOU on their balance sheet for $150m. In the short term, the company looks healthier than it actually is and in the longer term, if the mine does go ahead then the Adani family make the money.” The trust that could enrich the family through coal royalties is held via the same tax haven companies as the solar companies. The $150m was one of several multimillion-dollar loans in Australia by public Adani company subsidiaries to private Adani family-owned companies. “If [the solar business] is the same as elsewhere, we know the Adani family has not actually put a single dollar into Australia – they’re inter-company loans to the family from the listed company,” Walters said. He said there were another three trusts registered by Adani in Australia around the solar projects but “beneficial ownership of these remains unclear at this stage”. The chief executive of Adani Mining, Jeyakumar Janakaraj, has dismissed any suggestion the Australian operations would be “hiding profits” via holding companies in tax havens. “There is absolutely no implication of this, as everything that is being done in Australia or in India is transparent,” he told India’s Economic Times. “We make regular filings to the tax offices and government authorities. This report is a desperate attempt by the activists who were not able to legally stall the [Carmichael] project or get the government to do it. “This is their last attempt to hurt the goodwill we enjoy, but we are going ahead with the project as planned.” The 175-megawatt plant would rate among Australia’s biggest solar projects, along with Adani’s proposed 100MW farm at Crinium Creek, also in central Queensland, and a 140MW far near Whyalla in South Australia. Adani is the largest solar generator in India. Adani declined to comment on the company arrangements.   Top

Reserve Bank, Business Council clash on tax rates

Glenda Korporaal, The Australian, 18 October 2017

Reserve Bank assistant governor Luci Ellis has challenged the Business Council of Australia’s argument about the importance of cutting the corporate tax rate in attracting foreign investment. Ms Ellis said the corporate tax rate in Australia was “irrelevant” for domestic investors because of our system of dividend imputation. She said if Australia could not attract foreign capital with its current tax and regulatory environment, the exchange rate would fall, and make Australia more competitive. Business Council of Australia chief executive Jennifer Westacott told the Citi Australia and New Zealand Investment Conference today that funds would flow from Australia to the US if President Donald Trump succeeded in his plan to cut the US corporate tax rate. She said it was important for Australia to continue to cut its corporate tax rate to make it competitive with the rest of the world and continue to attract foreign investment. “Business investment in Australia is now at the lowest it has been as a share of the economy since 1994, off the back of the last recession,” she said. Ms Ellis said the tax rate was one of many variables considered by foreign companies in investing in Australia. She said Australia had seen a strong wave of investment in mining because of the mining boom of the last decade. She said foreign companies invested in Australia because we had LNG, iron ore, coal and now lithium. “We have had a strong phase of about 10 years of incredibly strong mining investment,” she said. “Guess what? Multinational resource companies are not going to make that investment in a country which doesn’t have those resources just because they have a lower tax rate. “They will invest where the LNG and the iron ore and the coal and the lithium actually are. “The real reason we attract foreign capital rather than rely on foreign capital is precisely because we have these resources. They are available and they aren’t going anywhere.” She said non-mining investment in Australia was already starting to pick up, as was demonstrated in the June national accounts figure. Ms Ellis said Australia’s dividend imputation system meant that the corporate tax rate was only an issue for foreign investors. “One of the differences between Australia and many other economies is that we have dividend imputation. “From the perspective of the domestic investor, the corporate tax rate was irrelevant. “It doesn’t matter because you get it back through dividend imputation. “It only matters if you are a foreign investor making the choice to invest in Australia versus another economy.” Ms Ellis said when foreign companies made decisions on where to invest they considered many variables including the tax rate, the business environment, the rule of law, the educational base of the country “and where the resources are”. “The reason we have a low share of business investment relative to the recent past is because we had a mining investment boom and that mining investment boom is almost over. “I am not sure I buy the idea that we have a great drought of non-mining business investment happening.” But Ms Westacott said that the corporate tax rate was an important factor for global companies considering where to make their next investment. “We are kidding ourselves to think that we are the only place in the world with LNG, with iron ore, with coal, and we are the only stable place to do business. “It is simply not true. If you are in a globally competitive environment, and you are a global board making a major investment, the tax rate matters.” She said Australia’s corporate tax rate of 30 per cent had been set years ago to keep the country in like with the OECD average. But she said OECD countries were now cutting their tax rates and the world was watching President Trump’s plans to cut the tax rate in the US, which was already generating a lot of business optimism in the US. Top

Cochlear warns on research tax changes

Sarah-Jane Tasker, The Australian, 17 October 2017

Cochlear’s chairman Rick Holliday-Smith has warned that the global biotech could be forced to move investment offshore under proposed changes to research tax incentives. Mr Holliday-Smith told his shareholders at today’s annual general meeting that Australia was looking to reduce research and development tax incentives at a time when many other countries appeared to be increasing incentives to attract R & D investment. He said the changes the government was considering were complex but appeared designed to cap the levels of eligible R & D and introduce a range of qualification variables. “We note that there are further proposed changes to incentives, which could further materially reduce the R & D tax benefits to Cochlear in Australia,” he said. Mr Holliday-Smith said the impact of the decision to alter the R & D tax incentives could only be understood over the longer term. “There may be little or no apparent impact from changes to taxation policy in the first year but over time I fear we will see the loss of an increasing amount of our incremental research investments to overseas jurisdictions,” he said. Cochlear (COH) spends more than $150 million a year on R & D related activities, which represents 12 per cent of its revenue, with the majority of that activity done in Australia. The Australian-listed company’s chairman said that while over 95 per cent of its revenue was generated outside Australia, the company paid more than 75 per cent of its taxes in Australia. He added that the R & D tax incentive was important for globally mobile, export-focused, advanced manufacturing companies like Cochlear. “These R & D related tax incentives have supported the commercial decisions that allow Cochlear to stay in Australia to the fullest extent possible and conduct the majority of its research in Australia,” he said. Mr Holliday-Smith said the company’s commitment to R & D in Australia provided a training ground for leaders of the next generation of innovators, especially in the field of medical technology. “We believe Australia needs global leaders in non-mining export-oriented businesses and we suggest Australia should encourage research-oriented companies like Cochlear, especially ones that are involved in advanced manufacturing and who are globally mobile,” he said. Top

Affordable power and tax cuts beat ‘picking winners’

The Australian, 16 October 2017

Bill Shorten’s claim in Adelaide on Saturday that the slogan he wants to hear in future is “Made in Australia’’ would be credible if the opposition turned its attention to the main problems impeding business and job creation. Labor should agree to pass the full gamut of the Turnbull government’s proposed company tax cuts — offset by reductions in recurrent government spending. On Wednesday, the House of Representatives is due to vote for the remainder of the government’s package, to cut the corporate rate from 30 to 25 per cent for all companies over the decade. In dismissing the plan as a “handout’’, the Opposition Leader is putting Australian manufacturers at a significant disadvantage to rivals offshore. Any leader serious about assisting manufacturing would also free up the workplace relations system to encourage wage rises based on productivity growth. Mr Shorten is promising that his proposed $1 billion Australian Manufacturing Future Fund would “make sure that you get access to the low-cost finance which gets you ahead of the pack ... Labor won’t let the big banks hold Australia’s advanced manufacturing back.’’ The fund would be modelled on the Clean Energy Finance Corporation, established by Julia Gillard under her agreement with the Greens to legislate an emissions trading scheme in 2011. As we said of the CEFC, taxpayers have often paid a high price for governments picking losers, which has too often been the case when they set out to pick winners. There is no reason why technically innovative proposals for automotive parts and food manufacturing, with good commercial potential, should not find investment backing. So should viable proposals for clean energy generation and storage. Both sides of politics, unfortunately, have built up unrealistic expectations that governments have the means to subsidise renewables at no cost to consumers. Today’s Newspoll reveals that a thumping majority of Australians — 63 per cent to 23 per cent — believe governments should continue taxpayer-funded subsidies for investment in renewable energy. At the same time, 58 per cent are unwilling to pay anything more in electricity costs to help implement a clean energy target to foster more renewable energy sources. Sharper battlelines over energy policy will be drawn when cabinet considers the government’s energy policy today, before a debate in the Coalition partyroom. While the government believes it is on track to reduce Australia’s carbon emissions under the Paris agreement by 26 to 28 per cent by 2030, the new policy is expected to emphasise reliability of supply over green energy subsidies. The ensuing fight with Labor and the Greens will be a defining issue until the next election. In addition to assisting households, affordable, reliable energy is essential to the future of Australian businesses. Without it, Mr Shorten’s “Made in Australia’’ mantra would amount to no more than hot air. Top

Property downturn a ‘threat’, says RBA

David Uren, The Australian, 14 October 2017

The property boom has lured hundreds of thousands of low-income Australians into negatively geared investments that the Reserve Bank fears could threaten financial stability in the event of a downturn. In a warning that rising household debts are the biggest domestic risk to the Australian economy, the Reserve Bank is conducting “stress tests” of the banking system to see how it would cope with a severe recession, in which house prices plunged by 40 per cent or more. In its latest review of the ­financial system, the Reserve Bank said the most vulnerable group of borrowers were those on low incomes. Its analysis of tax records shows 11 per cent of people earning less than $50,000 have an investment property, and most of them are negatively geared. “Household indebtedness is high and, against a backdrop of low interest rates and weak income growth, debt levels relative to income have continued to edge higher,” the RBA said. Household debt recently touched a debt-to-income ratio of 194 per cent — one of the highest in the world. The bank says while some households had taken advantage of low interest rates to accelerate their mortgage repayments, others had taken on more debt. “Higher interest rates, or falls in income, could see some highly indebted households struggle to service their debt and so curtail their spending,” the bank says. Although the initial assessment from the RBA stress test is that the high level of retained bank profits would provide a buffer in the event of a downturn, much would depend on how steep the fall in revenue was. The RBA identifies three groups that are particularly exposed: investors aged over 60 who are still carrying mortgage debts; people negatively gearing multiple properties; and those buying properties in interstate markets they don’t understand. The bank estimates about two million people have investment properties, of whom 80 per cent have a mortgage and 60 per cent are negatively geared. “With many not earning positive income from their property, prospective capital gains are more likely the primary rationale for investing,” it says. The RBA has long called for reform of property ­taxation, arguing that negative gearing and capital-gains concessions could encourage excessive speculative investment. The tax records show that 45 per cent of property investors earn less than $37,000 while more than 75 per cent earn less than $87,000. Although people on high incomes incur the biggest losses on their negatively geared investments, the Reserve Bank says that relative to incomes, the losses are greatest for those at the bottom end of the income scales. “Lower-income taxpayers may be more vulnerable to ­increases in debt-repayment ­obligations or reductions in ­income,” it says. “They might also be more ­reliant on rental income to meet their repayments.” Among community and personal service workers, for example, about 10 per cent have an investment property, of whom two-thirds are negatively geared. Their average income is only $31,790. Similar shares of low-earning labourers and sales workers have negatively geared investment properties. The RBA says about 35 per cent of people in the lowest income bracket are aged over 60, of whom many are retired. Over the past decade, the share of property investors aged over 60 has doubled to about 22 per cent. Of those with no income, suggesting they have retired, about 40 per cent still have a mortgage. The RBA’s analysis shows there has been rapid growth of people holding multiple properties. The numbers holding five or more investment properties jumped by 7.5 per cent in 2014-15, the latest year for which tax records are available. The tax data does not reveal further information about the incomes and characteristics of the multiple property investors, but the RBA says that they “likely contributed to higher risk”, given the strong growth in investor credit during the boom and the riskier types of borrowing, such as interest only loans, that have been popular. Top

Higher taxes to hit 1.6 million Australians, Parliamentary Budget Office report reveals

Eryk Bagshaw, The Sydney Morning Herald, 12 October 2017

More than one million Australians will be hit with increased taxes over the next five years as the rising wages of middle income earners force them into higher tax brackets. The assessment from the Parliamentary Budget Office, released on Wednesday, could set the stage for pre-election personal tax cuts as early as next year. The Budget Office found the average tax rate will climb 2.3 percentage points over the next five years and affect at least 1.6 million Australians. "The largest increase is expected to be faced by individuals in the middle income quintile, whose taxable income is expected to average $46,000 in 2017-2018," the Budget Office said. "Their average tax rate is expected to increase from 14.9 per cent to 18.2 per cent." The 20-year-high is equivalent to an extra $2000 tax per year for someone on that income. As a result, people are pushed into higher tax brackets without necessarily earning more money in real terms. Treasurer Scott Morrison undertook the first significant change to tax brackets since 2007 when he increased the middle tax bracket threshold from $80,000 to $87,000 from July 2016. The changes saved about 500,000 Australians from shifting into the next tax bracket at the time, but the Budget Office is now predicting that by 2021 up to 900,000 people will move into that tax threshold, where they pay 37¢ in tax on the dollar. The government has in the past relied on this extra revenue to get it on the path back to surplus and as a result meaningful tax relief for other income groups has not occurred for the past decade. "The government will consider further measures to reduce the burden of tax as fiscal settings allow," Mr Morrison said last year, describing bracket creep as the "silent tax" that discouraged people from working more and hinting further adjustments could be on the cards. The Budget Office said in addition to bracket creep, average tax rates are projected to increase due to policy changes - most notably the decision to increase the Medicare Levy from 2019-20 - that will particularly hit people in the third, fourth and fifth highest tax brackets. It added that demographic changes would also reduce the overall net tax rate by 2021, as net migration increases the proportion of younger workers and an ageing population increases the number of seniors. Shadow treasurer Chris Bowen said middle income earners would wear the greatest tax burden under the Coalition. "At a time when wages are growing at record lows and households are facing a cost of living crunch due to record levels of debt and rising energy costs, now is not the time to be hitting middle Australia with increases in personal income tax rates," he said. Top
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Bracket creep hit greatest for middle-income workers: PBO

Adam Creighton, The Australian, 12 October 2017

Middle-income earners will bear the brunt of bracket creep over the next four years, as routine wage increases push 1.8 million taxpayers into higher tax brackets, according to Parliamentary Budget Office analysis that finds returning the budget to surplus by 2021 will fall almost entirely to taxpayers.

Bracket creep combined with a planned 0.5 percentage point rise in the Medicare Levy from 2019 will more than undo the sizeable income tax cuts implemented by the Howard and Rudd governments for all but the lowest earners by 2021, the analysis found.

“By 2021 the average tax rate for individuals in the lowest two income quintiles is still expected to be below its average in 2000, while the most significant ­increases will have occurred for individuals in the top two income quintiles,” the PBO said.

Compared with 2000, the top 40 per cent of taxpayers will pay average income tax rates almost three percentage points higher.

The PBO estimated that taxpayers in the middle of the income distribution, who have average ­incomes of $46,000 this year, would face a 3.2-percentage-point increase (to 18.1 per cent) in their average income tax rate by 2021 (assuming their incomes rose to keep pace with inflation), which would be above the 2.3-percentage-point average increase for all taxpayers. “While the middle-­income quintile is projected to ­experience the largest increase in average tax rates over the period to 2021, this was also the quintile that benefited from the most significant reductions in average tax rates during the 2000s,” it noted.

Significant income tax cuts ­accompanied the introduction of the GST in 2000 and were ­followed by further cuts over the five years to 2011, initiated by Peter Costello as treasurer and largely implemented by the Rudd government.

Economist Saul Eslake said he wasn’t surprised bracket creep — where rising incomes push up workers’ average tax rates — had been allowed to erode those cuts.

“The cuts weren’t funded by cuts in spending — in fact, government spending was actually rising, in real per capita terms, faster than at any time since the Whitlam years — but rather by temporary revenue windfalls generated by the commodities and asset price boom,” he said. “Nevertheless there will obviously be enormous political pressure for tax cuts between now and 2021, targeted towards people in the middle quintile because that’s where most ‘swinging’ voters are.”

Labor, which proposes to match the government’s promise to lift the Medicare Levy to fund the NDIS but only for higher-­income earners, seized on the report. Treasury spokesman Chris Bowen said: “The government wants to increase personal ­income tax on every PAYG worker earning more than $21,000 a year via the Medicare Levy while Labor supports a more targeted approach.”

Acting Treasurer Kelly O’Dwyer said Australia faced a “tax-tsunami scenario” under Labor, pointing out that the ­Coalition had lifted the second-­highest income-tax threshold from $80,000 to $87,000 last ­financial year — the only effort to deal with bracket creep in six years.

“Our company tax cuts will mean money in the pockets of hard-working Australians, as Treasury modelling confirms,” Ms O’Dwyer said.

The PBO analysis said the return to surplus in 2021 “predominantly” rested on increases in income tax via bracket creep. About 900,000 taxpayers would move into the 37 per cent bracket by 2021, 700,000 into the 32.5 per cent bracket, and about 200,000 into the top 45 per cent bracket, it estimated.

In 2013, the Gillard government tripled the tax-free threshold to $18,200 and lifted the bottom two rates of income tax to 19 per cent and 32.5 per cent, respectively, as part of reforms to partly fund the NDIS.

Mr Eslake said the changes had been “the opposite of good tax design because it narrowed the base and raised the rates”.

He said the government should consider cutting personal tax rates rather than company tax rates.

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We need a GST-style consumption tax for carbon emissions

Alan Mitchell, The Australian Financial Review, 11 October 2017

Tony Abbott is stirring the political pot, but he is not the fundamental cause of the Turnbull government's climate and energy policy problem.

The real problem dogging the Prime Minister and the glittering cast of energy sector executives at The Australian Financial Review National Energy Summit this week is that there is more than one perfectly defensible response to climate change, and the public remains deeply divided on which course to take. Just ask the Nationals whose constituents face high electricity prices and reduced employment in the coal industry.

Australia remains committed to the relatively stringent emission reduction targets embraced by the Abbott government in Paris. However, the decision by the United States to withdraw from the Paris accord threatens to put the other advanced economies at a competitive disadvantage.

For Australia, which is too small to make a significant difference to the global level of greenhouse gases, an obvious strategy would be to link its efforts to those of the US and the other advanced economies.

That almost certainly has always been Tony Abbott's underlying policy strategy. He as good as admitted it at his first press conference as Liberal leader, and it explains the ease with which he can now reject his own emission-reduction targets.

The onus now is on the Turnbull government to both argue its case for doing more, and to do everything possible to minimise the cost of its policy to the nation.

Political challenge

The latter represents a major political challenge for the Prime Minister. There is much talk about the falling cost of renewable energy, particularly wind power. But the unpredictable variability of wind power and solar generation means they must be accompanied by heavy parallel investment in back-up generation, transmission, energy storage and demand management.

The former Productivity Commission chairman, Gary Banks, points out that Australia's politicians have embraced stringent emission reduction targets while, at the same time, they have rejected the least-cost means of making the transition, including the use of gas and nuclear power.

Like the former Treasury economist, Geoff Carmody, Banks warns that the hard choices facing the country have been obscured by governments pretending that they are delivering reliable, affordable and low-emission energy when, on the politically acceptable technologies available, that is impossible.

The truth is they can achieve reliability and low emissions, but not at "affordable" prices.

Governments also have added to the cost by focusing the emission-reduction effort so heavily on the electricity generation sector. This has unnecessarily narrowed the scope for innovation.

Banks points out that in 1991 the Industry Commission warned government of the need for an economy-wide approach to reducing the use of fossil fuels, and the same recommendation has now been made again by the Finkel Review: "By 2020, the Australian government should develop a whole-of-economy emissions reduction strategy for 2050".

Of course, the reason the current policy is still so narrowly based is that no one has had the courage to widen it.

The Turnbull government is facing some very hard decisions. The current policies almost certainly cannot reduce emissions to 26-28 per cent below their 2005 levels by 2030.

The Finkel report is part of a government review of climate policy that is due to be completed by the end of the year. That is this government's chance for serious change.

Turnbull should start by bringing the public into the difficult decision-making process. The days of politicians pretending that they can cut greenhouse emissions painlessly must be over.

Unpalatable truth

The first unpalatable truth is that making Australia a low-emissions economy is going to be difficult and costly, and Australian households and businesses will be sharing the bill.

The second is that a broadly based, technology-neutral carbon tax or its close cousin, the equally despised emissions trading scheme, represents the lowest-cost way to reduce greenhouse emissions. That's because they give the maximum number of people the greatest freedom to find their own ways to reduce emissions.

The Turnbull government, however, could make its carbon tax a good deal less painful than the Gillard government's emission trading scheme, by taxing the consumption rather than the production of greenhouse emissions.

This is an innovation proposed by Carmody in Australia, but that has been widely advocated by economists in the US. The main effect of the change would be to exclude exports and protect import-competing industries from having to shoulder the burden of the tax.

It would be controversial. The Greens would complain about the big polluting multinational exporters being let off the hook, and Labor will claim it's an extension of the GST by stealth. It would, in fact, be collected using the same accounting mechanism as the GST.

But it would help trade exposed industries, and it should take some of the pressure off the Nationals. The whole of regional Australia has an overarching exposure to global markets.

And, at least in the early years, a tax on carbon might make a worthwhile contribution to getting the budget firmly back into surplus – another challenge that the Liberals have found to be unexpectedly difficult.

Top

Income tax key driver towards surplus: PBO

Colin Brinsden, The Australian, 11 October 2017

The federal government's promise to bring the budget back to surplus is predominantly on the back of an increase in personal income tax revenue, a new analysis has found. The independent Parliamentary Budget Office found the average tax rate faced by individuals is estimated to increase by 2.3 percentage points between now and 2020/21 with middle-income earners bearing the largest burden at 3.2 percentage points. "This reflects the impact of bracket creep, on account of both inflation and real income growth," the PBO says in the report released on Wednesday. "In addition ... average tax rates are projected to increase due to policy changes, most notably the policy decision to increase the Medicare levy from 2019/20." Shadow treasurer Chris Bowen jumped on the report, saying it vindicates Labor's opposition to the Medicare levy increase on low and middle-income earners. Labor wants the levy to be more targeted towards the higher end of the income tax scale. "Despite the Liberal Party's low tax talk, the Turnbull government is only delivering tax cuts for big business while actually increasing income taxes for low and middle-income earners," Mr Bowen said in a statement. Opposition Leader Bill Shorten said since the global financial crisis there has been a growing divide between those who derive their wealth from assets and those who rely on wages. "When financial pressures increase - with rising prices, with increasing income taxes, with flat wages, with cuts to penalty rates - the consequences don't stop at the individual family budget, they reach right through the economy," he said in a speech to the John Curtin Research Centre in Melbourne. Business Council of Australia chief executive Jennifer Westacott told the National Press Club to get wages up there needs to be increased productivity. She insists tax relief for medium and large companies will drive higher wages, more job creation and stop Australia's slide in being uncompetitive on the world stage. The Turnbull government's next phase of business tax cuts is still up for debate in parliament, with Labor remaining opposed to lowering the rate for all businesses to 25 per cent. Ms Westacott, who recently returned from Washington, heralded President Donald Trump's plan to reduce the US rate from 35 per cent to 20 per cent. "We are falling behind; it is not about companies and directors and boards, it is about workers and wages," she said. Her push comes as charity organisation Oxfam seized on tax office figures showing multinationals avoided paying an estimated $2.5 billion into the public coffers in the 2014/15 financial year - a figure it thinks is conservative. "This is still $2.5 billion which could be used to pay for schools, hospitals and other essential public infrastructure," the group's economic policy adviser Joy Kyriacou said. Top

ATO's tax gap figures revealed: $2.5 billion missing from corporates, multinationals

Nassim Khadem, The Sydney Morning Herald, 11 October 2017

An estimated $3.5 billion in revenue from large corporates and multinationals is at risk to the economy, but through audit activity this will reduce to $2.5 billion, according to the Australian Taxation Office. On Wednesday the agency is releasing the first tranche of its long-awaited highly anticipated "tax gap" figures, which focuses on 1400 corporate groups with gross income of over $250 million. This is the first time the agency has ever put specific dollar values on the tap gap, which measures the theoretical difference between the total amount of income tax collected and the amount the ATO estimates would have been collected if every one of those taxpayers was fully compliant. The agency's figures show that in 2014–15, large corporate groups reported $1.5 trillion in gross income and paid about $41 billion in tax. The agency estimates that after audit activity, the net income tax gap for this group is $2.5 billion in 2014-15 or 5.8 per cent of tax payable.

Room for error

This trend has been steady for a number of years, the agency said, and the gap primarily reflects differences in the interpretation of complex areas of tax law. Since the estimates rely on predicting the outcomes of audits still underway - and also do not measure all instances of non-compliance (that is the companies the ATO chose not to audit) - there's some level of error. Deputy Commissioner Public Groups Jeremy Hirschhorn likened measuring the tax gap to drug testing undertaken during the Olympics: "They don't do drug testing to catch lots of drug cheats but to make sure that there's a clean Olympics," he said. Mr Hirschhorn said a 5.8 per cent tax gap was was "pretty good on a global scale, but our aim is to significantly reduce that". But Oxfam Australia's Economic Policy Advisor Joy Kyriacou said $2.5 billion was a conservative estimate. "The ATO can only report on what large companies are bound to tell it, not on taxes which multinationals are dodging through legal tax avoidance," she said.​

ATO to keep cutting deals

Over the past few years, under the leadership of Tax Commissioner Chris Jordan, the ATO has opted to cut deals with big business rather than had to court. In the 2014-15 year there was a huge $3 billion variance between tax bills initially issued by the ATO to 81 large companies, and the money the agency ended up pocketing after it cut deals with these companies. The ATO has $4 billion worth of disputes going on with big business at the moment, most of which are transfer pricing cases, such as the $1 billion dispute with miner BHP Billiton over its Singapore marketing hub, and some of which date back almost over a decade. BHP Billiton has said it's willing to head to court to settle the dispute. But speaking generally about the tax gap figures, Mr Hirschhorn, who has much input into what cases the ATO litigates, said the he expects they will settle most of the $4 billion cases under dispute out of court. There had been higher audit activity under tougher domestic laws like the Multinational Ant-Avoidance Laws which has led to companies like Google restructuring, Diverted Profits Tax and stronger transfer pricing powers, he said. The coming year would be another big year for settlements, he said, but the variance between what the ATO wanted and settled on would slightly shrink, he said.

Disputes about margins

Mr Hirschhorn said the biggest driver of the tax gap was "primarily transfer mispricing". Of $4 billion in tax bills issued to large corporates and multinationals in the 2016-17 financial year, he said about $1 billion related to transfer mispricing of related party debt (as seen in the case of Chevron), about $1 billion was transfer mispricing of inbound e-commerce and about $500 million was transfer mispricing via commodity trading hubs. He said some corporates had already entered into 50/50 arrangements whereby the pay half the the tax bill in advance of objections. The issue with cases of companies channelling money through low-tax Singapore, wasn't that companies were using marketing and service hubs, but rather the profit margins they are attributing to doing business there. "The issue isn't having a Singapore hub -  that's a commercial decision," he said. "What we say is, 'how much profit are you attributing to these people [in Singapore]? "If you were to outsource that function would you give them a ten times profit?' We would say, 'no. You'd give them a good profit - they are smart people working hard for you - but you wouldn't give them all the profit'."

Delay in release

While Britain has been publishing tax gap figures for some time, the ATO has been taking its time in releasing numbers - it was supposed to do so in last year's annual report. The agency is yet to release tax gap figures for sectors of the economy where it says black economy activity is prevalent including, the highly wealthy individuals market segment, the small business segment and for other individuals. "Our plan is to progressively review tax gaps for other markets over the next few years," Mr Hirschhorn said. The ATO's corporate tax gap estimate covers a seven-year period between 2008–09 and 2014–15. The tax gaps for earlier years were $2.7 billion in 2008-09, $2.3 billion in 2009-10, $2 billion in 2010-11, $2.7 billion in 2011-12, $2.5 billion in 2012-13, and almost $3 billion in 2013-14.

Criticisms of tax gaps

One of the expert panelists who helped pull together the figures, tax expert and UNSW Business School adjunct professor, Richard Highfield, said the estimates were in line with those of other revenue agencies such as Her Majesty's Revenue & Customs (HMRC). But the HMRC 214-15 tax gaps figures of £36bn, or 6.5 per cent, have been condemned for ignoring estimated tens of billions lost in profit shifting and tax avoidance by multinationals. Professor Highfield noted for the ATO data, there was some error relating to audit activity or non-audits, but it would be relatively small. But Oxfam's Ms Kyriacou said the ATO figures also don't capture the more than $US100 billion that multinationals are estimated to be ripping out of developing countries every year by avoiding taxes. The Corporate Tax Association's Michelle de Niese, whose members include hundreds of big corporates, said "cracking down on large corporates is not the panacea for Australia's budget woes".   Top

Tax office may soften SMSF rules

James Kirby, The Australian, 11 October 2017

Controversial and laborious event-based reporting rules for Australia’s army of DIY super fund operators may be softened by the tax office in coming weeks. Under current plans the Australian Taxation Office wants all SMSFs (self-managed super funds) to report much more regularly to Canberra. At present most SMSFs need only deal with the tax office once a year at “tax time”. But the ATO ultimately wants funds reporting “event-based” activity on a monthly basis. The new reporting rules are set to begin on a quarterly basis under a two-year phase-in, starting on July 1 next year. The new reporting regime has the potential to affect a lot more fund operators than this year’s changes in pension tax rules. The majority of funds will not be affected by the tax rule changes around a $1.6 million individual balance cap introduced on July 1. But almost any fund could be caught in a new web of bureaucracy planned by the ATO. The SMSF Association, which represents professionals in the sector, is lobbying Canberra to make an exemption in reporting requirements for SMSFs with less than $1m in individual assets. Such an exemption would make a lot of sense in the current framework which already effectively exempts this group from the extra tax potentially loaded on funds that breach the new balance cap. Jordan George, head of policy at the SMSF Association says: “We are expecting to hear where the ATO has got to on the issue in the next fortnight.” ATO Assistant Commission Kasey McFarlane recently told an industry conference the idea of the exemption for funds with less than $1m was currently under consideration. The “event — based” reporting requirements centre on major movements of money inside SMSFs such as starting a pension or lump sum activities. SMSF operators will be expected to report key events to the ATO within 10 days of the formalised reporting period. Until July 2020 this will be 10 days after the end of each quarter. There are fears within the SMSF sector that the application of new reporting rules, coming so quickly off the back of a complex regime change around tax rules, will reduce the attraction of DIY funds, which have been enjoying strong growth in recent years. The key changes under the tax rules were a reduction in the amount that could be contributed on both a pre-tax and after-tax basis to superannuation fund and the imposition of the $1.6m balance cap on super funds which will require tax to be paid on earnings on amounts above this level. Top

Middle-income earners' tax hit to pay for Coalition company cuts

Gareth Hutchens, The Guardian, 11 October 2017

The government’s plan to return the budget to surplus is heavily reliant on personal tax increases across every income bracket but hitting middle-income earners hardest, the Parliamentary Budget Office has revealed. Middle income earners (with an average taxable income of $46,000) will experience the highest average tax increases of any income quintile, jumping 3.2 percentage points, from 14.9% to 18.2% over the next five years. The PBO’s paper, released on Wednesday, reveals for the first time how the Turnbull government’s projected budget surplus in 2020-21 is relying on specific increases in average personal income tax rates. The tax hikes reflect a seismic shift in the taxation burden from businesses to individuals. The personal tax increases are necessary to compensate for the government’s controversial $65.4bn company tax cut. According to the PBO, the average tax rate on individual Australians is estimated to increase by 2.3 percentage points between 2017-18 and 2021-22. But there are large differences between income quintiles. Taxpayers in the first income quintile (the lowest 20% of income earners) will see their average tax rate increase by 0.2 percentage points over the next five years. Taxpayers in the second income quintile will see their average tax rate increase by 2.5 percentage points. Taxpayers in the fourth quintile will see their average tax rate increase by 2.3 percentage points. Taxpayers in the fifth quintile (the highest 20% of income earners) will see their average tax rate increase by 1.9 percentage points. The PBO report shows the Turnbull government is relying heavily on “bracket creep” to bring the budget back to surplus. Bracket creep is the phenomenon whereby taxpayers shift into higher tax brackets when their nominal incomes grow, due to inflation and/or real wages growth. The PBO says the government’s projected budget surplus is relying heavily on more than 1 million Australians shifting into higher tax brackets over the next five years, where their average tax rates will increase. Projections show over 900,000 taxpayers will move from a marginal tax rate of 32.5% to 37% between 2017-18 and 2021-22. Similarly, 700,00 people are projected to move from a marginal tax rate of 19% to 32.5% over the same period. “In addition to the effect of nominal income growth, average tax rates are projected to increase due to policy changes, most notably the policy decision to increase the Medicare levy from 2019-20,” the PBO report says. Two weeks ago award-reliant workers in the fast food, hospitality, retail and pharmacy sectors lost millions of dollars in income collectively after their public holiday penalty rates were cut in Victoria, Queensland, New South Wales, the ACT and South Australia. According to the McKell Institute, a Labor-aligned thinktank, those workers may have collectively lost between $4.7m and $9.5m on the grand final weekend, depending on how many were rostered on. The PBO warned earlier this year that the Turnbull government’s plan to return the budget to surplus on the back of rising personal income tax relied heavily on a sharp acceleration in wages growth over the decade. It warned the “significant slowdown” in wages growth experienced in the past few years suggested this gamble by the government was subject to “downside risk”. Top

Jobs, tax and politics: three ways electric vehicles will change our world

Hussein Dia, The Conversation, 6 October 2017

China, the world’s largest car market, is working on a timetable to stop the production and sale of vehicles powered by fossil fuels. India has declared its intention to make all new vehicles electric by 2030. Like Britain and France, these two markets are looking to phase out the sale of petrol and diesel vehicles over the next 20 years or so. Vehicle manufacturers, the oil industry and governments are starting to wake up to the disruption that vehicle electrification could bring about. Even automakers recognise that they cannot afford to be legislated out of these lucrative markets. Volvo, Jaguar and Land Rover, Volkswagen, Mercedes, Audi and BMW have all promised to roll out electric models over the next decade. Electro-mobility now seems inevitable, but the impact this shift will have on jobs, the oil economy and even national tax systems will be profound.

The global impact on jobs

Electric vehicles, including their batteries, generally require less manufacturing labour than ones that run on petrol. For this reason, among others, a phase-out of combustion engines by 2030 could cost an estimated 600,000 jobs in Germany alone, according to one report from the country’s Ifo Economic Institute. But it may not all be doom and gloom. According to the Australian Federation of Automotive Parts Manufacturers (FAPM), the ban may be good news for suppliers to the Chinese market, including Australia. Although Toyota and other local car manufacturers have shut down their Australian facilities, as electric vehicles become easier to build the manufacturing process may become simplified and robotised, creating new manufacturing and business opportunities for the right investor.

The disruption of oil

Going all-electric by 2030 will place considerable budgetary stress on major oil-producing countries, and change the geopolitical map. Stanford economist Tony Seba and his team push the vision of an electric vehicle revolution a step further, and predict that the disruption will come earlier, during the 2020s. They argue that oil demand will peak at 100 million barrels per day by 2020 and shift to 70 million barrels per day by 2030. According to their 2017 study, net exporting countries like Venezuela, Nigeria, Saudi Arabia and Russia will feel the greatest impact. They also claim that the geopolitics of lithium, which along with nickel, cobalt and cadmium, is key to electric vehicles, are entirely different from oil politics. Although there is potential for supply disruption, lithium is not as critical as oil in the life of a car. According to Seba: Lithium is a material stock and, in the electric vehicle industry, is only required to build the battery, while oil is a fuel required to operate an internal combustion engine vehicle. Lithium scarcity would only affect new vehicle production. Not having lithium is like not having a new engine; the existing fleet can still operate for years. Oil is essential to operate the existing fleet; thus, oil is a far more critical part of the value chain.

The impact on government coffers

By 2030, revenues from petrol taxes could be reduced significantly, with the shift from individual ownership of petrol vehicles to shared (and ultimately autonomous) electric vehicle fleets. Governments whose budgets rely on this revenue stream could find themselves shifting to road pricing, such as charging per kilometre of travel or congestion charging. Modelling by Seba and his team shows that US$50 billion from petrol taxes could disappear from the US economy. In Australia, according to the Bureau of Infrastructure, Transport and Regional Development, public sector road-related revenue totalled A$28.7 billion in 2014-15. Fuel excise contributed about A$11.03 billion or 38%, down from about 44% in the early 2000s. This revenue will come under direct threat with increasing electric vehicle market adoption. My research also shows that under some future scenarios of shared autonomous mobility, the car fleet size could shrink to around 80%, meaning less income from vehicle registration fees and sale taxes, maintenance, insurance and parking.

The future outlook

Although the detail of the bans in China and India are still sketchy, they represent just the kind of government policy shifts that are likely to make electric vehicles more pervasive. Some groups, such as oil giants BP and Shell, would disagree that the end of oil is upon us. It’s been argued that electric vehicles are not a game-changer, as oil demand will continue to rise in the developing world and improvements in fuel efficiency will deliver benefits that outweigh those from electric vehicles. Top

ATO flags crackdown on firms over GST on internet goods

Annabel Hepworth, The Australian, 6 October 2017

The Australian Taxation Office is beefing up its data-matching capabilities with the Department of Immigration and Border Protection ahead of the government’s contentious plan to impose GST on internet imports worth less than $1000 from July next year. The crackdown is flagged in a new submission to the Productivity Commission, which is inquiring into the model for collecting the 10 per cent GST on low-value imports. “This will complement our existing sources of information such as financial transaction tracking,” the ATO submission says. The ATO says it has already identified up to 3000 businesses that may need to register for GST on the low-value goods. It says “a number” of businesses and tax professionals have sought information on compliance, but it will target those who fail to comply. “The ATO has long experience with managing the Australian tax obligations of non-resident populations,” the submission says. “Many non-residents have been required to register for and account for GST since it commenced in 2000.” The ATO move comes as US retail giant Amazon pushes to change the way the GST will be collected on low-value purchases. Amazon insists that the shortcomings in the government’s planned model are more signi­ficant than those in the model the­­ e-commerce player wants. The online retail group wants a system that would see transport companies collect the GST on low-value imports they deliver but the government’s legislated plan is for online marketplaces to collect the tax. Air delivery giants have fired a fresh salvo at the attempts by online retailers to change the model. Amazon and the freight companies have ratcheted up the ­debate in supplementary sub­missions to the Productivity Commission. Australia Post has said Amazon’s plan would saddle it with extra cost that would outstrip the revenue it would collect, “rendering the model unviable and unfair”. “Further, implementation of this model would result in increased costs on the existing mail streams, impacting the overall profitability of Australia Post and, in turn, on any future dividend payment to our shareholder, the Australian government.” But Amazon has fired back, saying that in many cases, CAPEC (Conference of Asia Pacific Express Carriers) and Australia Post appear to have misunderstood the model “and its simplicity and feasibility”. On Australia Post’s warnings about the extra costs for the business, Amazon said Australia Post can charge these to the originating postal operator or customer. Amazon said it estimated the costs of collecting data to calculate and charge the GST would be $3 per shipment. “Australia Post has not provided cost estimates to support its concerns. We suggest that Australia Post quantify these costs,” Amazon said in the new submission. In fresh criticism of the Amazon model, CAPEC warned that overseas express carriers and postal operators “would need to establish huge overdrafts to carry GST liability”. But Amazon said the GST would only be payable to the Australian Taxation Office when the next business activity statement was due, which could be quarterly or monthly in arrears. “GST can be charged to and collected from overseas transporters either upfront or through credit agreements which align to the transporter’s cash flow requirements,” Amazon said. The Productivity Commission inquiry is being held after Labor secured the government’s agreement to hold it. The inquiry has reignited debate about the model for collecting GST on imports worth less than $1000, which starts from July 1 next year. The ATO says it is rolling out a “comprehensive strategy” to implement the legislated model by July next year, but this would be affected by any departure from the current model. Top

'The great Australian nightmare' alive and well in Sydney, Melbourne

Emily Cadman, The Sydney Morning Herald, 5 October 2017

Home ownership among young Australians has fallen to the lowest level on record, as an explosive property boom squeezes out all but the wealthiest. Supercharged by record low interest rates, a lack of supply and a tax system that favours property investors, home prices have surged more than 140 per cent in the past 15 years, propelling Sydney past London and New York to rank as the world's second-most expensive housing market. Melbourne, ranked the world's most liveable city the past seven years by the Economist Intelligent Unit, is now the planet's sixth-most expensive place to buy a house. In response, home ownership among the young has plunged: only 45 per cent of 25-to-34 year-olds own their own home, down 16 percentage points from the 1980s, with almost half the decline coming in the past decade. At the same time, hefty mortgages have pushed household debt to a record, acting as a drag on the economy's 26 years of unbroken growth. As more people retire still owing a mortgage, or renting, they are more likely to qualify for government welfare, undermining the $2.3 trillion pension savings system. "The great Australian dream of home ownership is becoming a nightmare,'' said Brendan Coates, a housing policy expert at the Grattan Institute. "It's down to a collective failure of government policy that will take at least two decades to fix." Voter angst over housing affordability is mounting: almost 90 per cent of Australians fear future generations won't be able to buy a home, according to an Australian National University survey. Failure to address the issue is heaping pressure on a government already under fire for the botched rollout of a $49 billion national high-speed internet network, and energy-policy bungling that's sent power bills soaring and triggered fears of blackouts this summer. One of the biggest flashpoints are tax incentives that have turned housing into a speculative financial asset. First-home buyers complain they can't compete against investors, who through negative gearing can claim the costs of owning a property-for-rent -- including mortgage interest -- as a tax deduction against other income. The allure of property investment was turbocharged in 1999, when capital gains tax was halved. With housing prices seen as a one-way bet, investors piled in. More than 2 million, or one-in-12, Australians own an investment property, with almost 30 per cent of those owning two or more. "More money going on servicing a mortgage means there is less to spend elsewhere, dragging on economic growth," said Paul Dales, chief Australian economist at Capital Economics. "It won't take many rate rises for indicators to start flashing amber and red for more-indebted households." As the average price of a Sydney home sailed past $1 million, housing affordability fell victim to the hyper-partisanship that has gripped Canberra over the past decade and paralysed policy making. During last year's election campaign, when the opposition Labor party proposed changes to limit negative gearing to newly-built houses and reduce the capital gains tax discount, Prime Minister Malcolm Turnbull retaliated by ruling out any changes and launched an assault claiming Labor's move would "take a sledgehammer" to the property market and "punish" mum and dad investors. A package of measures in the May budget aimed at improving housing affordability only tinkered at the edges -- targeting overseas investors who leave properties vacant and offering tax breaks for people saving for a deposit on their first home. State governments have also done little to address the issue, relying on policies such as stamp duty discounts or grants to first-home buyers that just act to push prices up even further. Politicians, meantime, have offered only superficial solutions. Former Treasurer Joe Hockey said buyers struggling to get into the market should simply "get a good job that pays good money." Deputy Prime Minister Barnaby Joyce said people priced out of Sydney should have the "gumption'' to move to rural areas like Charleville in outback Queensland -- where houses are about one-sixth the price of Sydney, but youth unemployment in the region is the highest in the nation. "What politicians have offered so far are band-aid solutions that might be popular in the short-term but will be ineffective in the long-run" said Judith Yates, who has advised the government on housing policy and is an honorary associate professor at the University of Sydney. "There hasn't been a serious attempt to tackle the fundamental causes of declining affordability." In contrast, other global cities - have taken more draconian measures to rein in home prices. Singapore has rolled out a series of measures from banning interest-only loans to pushing up stamp duty, triggering a three-year slide in prices. In Canada, prices have slumped in Toronto after the provincial government announced a slew of measures, including a 15 per cent tax on foreign buyers and the introduction of rent controls. Adding to demand pressures, Australia's migration program has helped swell the population by almost 4 million since 2006, with most settling in the major cities. Supply has been unable to keep up, with dwelling completions running below underlying demand for more than a decade. Much of the new housing is small apartments aimed at investors, rather than families. There is also a social cost to sky-high house prices. Workers such as teachers, nurses and other low-to-middle income earners can't afford to live in the communities they serve, while young people who stay at home longer while saving a deposit might delay marriage and childbirth. "It's a very different atmosphere in Australia,'' said Professor Richard Ronald of the University of Amsterdam's Centre for Urban Studies. "I haven't come across this kind of resistance elsewhere to the understanding of 'Generation Rent' as a fundamental shift in history."   Top

Trump's tax plan to result in 'little-to-no taxes' from multinationals

Nassim Khadem, The Sydney Morning Herald, 29 September 2017

Australia's top corporates and their advisers say companies are more likely to base future projects offshore thanks to Donald Trump's plans to slash the US company tax rate as well as end taxes on foreign profits of US-based multinationals.

And while big business in America has largely thrown its support behind Trump's tax reform plan, a number of Washington-based lobby groups have warned the changes make it easier for multinational corporations to pay little-to-no taxes on all profits that they book offshore.

Mr Trump has proposed cutting the US corporate tax rate from 35 per cent to 20 per cent. His plan, which is still scant on detail and has no explanation of how it will be funded, will also give a one-time "tax holiday" to companies such as Apple and Microsoft to return overseas funds to the US. But as yet,Mr Trump hasn't specified what the one-off reduced corporate tax rate would be. CSL's chief financial ​officer David Lamont told Fairfax Media that while the tax environment is one of several factors they take into account when making capital investment decisions, it does impact decisions such as where to base future projects.

CSL, which operates a plasma collection network with nearly 180 centres in the US and Europe, earns about 40 per cent of its total annual revenue in the United States. It is among a number of the nation's largest companies – others include Amcor, BHP, Boral, CSL, James Hardie and Westfield – that have a big presence in North America.

A challenge to Oz?

Treasurer Scott Morrison said the "US has laid down the challenge" in a move to lower corporate tax rates.

He said Australia – where the company tax rate is still at 30 per cent for the big end of town – must move quickly to ensure it is not "stranded for investment internationally when it comes to competitiveness on tax". AmCham chief executive Niels Marquardt also welcomed Mr Trump's proposals saying it would "put pressure on other jurisdictions to follow suit", or risk losing "some of their competitive edge". PwC tax partner Paul Abbey said Mr Trump's move will make the US a more attractive place to invest relative to higher-taxing countries such as  Australia. "They [the US] will be more attractive and will attract more foreign investment," Mr Abbey said. "You can't deny that."

How to pass Congress

Mr Trump faces a battle in getting his proposed changes through the Senate – where only two of the 52 Republican senators need to cross the floor for it to be defeated completely.

The Tax Institute's Senior Tax Counsel, Professor Robert Deutsch, said if the proposed changes pass through the US Congress: "Australia will be at a tax disadvantage with yet another of our major trading partners".

KPMG tax partner Grant Wardell-Johnson said Trump's proposed cut to the company rate, as well as the new US repatriation model and additional deductions for capital expenditure would "all tip marginal investment decisions away from Australia".

Mr Wardell-Johnson said the Democrats would likely support the proposed move to a territorial tax system. "This would be combined with a transitional measure which would tax at some concessional rate current profits which are parked offshore because it is too costly for businesses to pay US tax on dividends remitted to the US," he said.

US tax holiday

It is estimated US-based multinational corporations currently have about $US2.6 trillion dollars overseas that have not been repatriated to the US because they would be subject to a 35 per cent corporate tax. Mr Trump will give companies an incentive to return the profits, although he's not yet said how much. In 2004, former US president George W Bush provided a similar tax holiday incentive at a reduced rate of 5.25 per cent. The Trump plan also would shift to a new "territorial" tax system for multinational corporations. Territorial taxation, in theory, means that companies would not be taxed on their overseas earnings. But in practice, to prevent erosion of the tax base, Republicans will likely impose some form of tax on foreign profits. Citi analysts said Mr Trump's tax blueprint, if enacted into law, "would constitute a positive for the US pharma sector due to lower corporate tax rates, repatriation of offshore earnings, which would likely facilitate increased M&A, [and] preservation of the R&D tax credit".

Tax loopholes remain

The Washington-based Economic Policy Institute says "the Republican plan makes the current loophole that big multinational corporations use to dodge their taxes by claiming profits have been made overseas permanent, rather then temporary".

Clark Gascoigne, deputy director of the FACT Coalition, which has been lobbying for greater taxing of US multinationals, agreed that Mr Trump's plan creates "the largest offshore tax loophole in American history".

"This plan will allow multinational corporations to pay little-to-no taxes on all profits that they book offshore by instituting what is known as a 'territorial' tax system," he said.

Mr Trump's plan acknowledges this problem – noting that US committees may attempt to come up with rules to prevent it.

But Mr Gascoigne said countries that have adopted lower tax rates for offshore profits have been unable to prevent corporations from booking profits in tax havens. "This is a tax plan that benefits the Cayman Islands and Switzerland far more than US taxpayers," he said.

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Donald Trump’s tax package a wake-up call for Australia

The Australian, 29 September 2017

Like most political leaders, Donald Trump will need the support of congress to enact his proposed tax reforms. In so far as the President succeeds, his bold proposal to cut the US corporate tax rate from 35 per cent to 20 per cent and simplify the tax system will boost US competitiveness in retaining and attracting business investment. Seven individual tax brackets also would be collapsed to three; standard deductions doubled; deductions for state and local taxes eliminated; and estate taxes eliminated. It’s no wonder, as business columnist Robert Gottliebsen wrote online yesterday, that Wall Street now is taking Mr Trump seriously.

Conversely, the package will make Australia even less attractive as a destination for such investment, which is bad news for business and jobs on this side of the Pacific, as the Business Council of Australia warned yesterday. That’s why our political class, especially Bill Shorten and his frontbench, whose “big taxing, big spending” class warfare mindset belongs to the less competitive world of a half-century ago, needs to start taking tax reform, especially corporate tax reform, seriously. The US remains by far the largest business investor in Australia, accounting for 27 per cent ($860 billion) of incoming investment last year, followed by Britain (16 per cent). Hong Kong ranked fifth place and China seventh. About 28 per cent of outbound investment from Australia went to the US. Nations such as France also are cutting their business taxes. Every such reduction, as BCA executive Jennifer Westacott said, was “a de facto tax increase in Australia and a disincentive for investors”.

In May, in his budget reply speech, the Opposition Leader could barely conceal his disdain for those who generated wealth and jobs, dismissing the Turnbull government’s vital corporate tax cut plan as “a $65bn giveaway for big business”. In maintaining that view, as opposition Treasury spokesman Chris Bowen did yesterday, Labor is disowning the legacy of the Hawke-Keating years when the then party of reform cut the company tax rate from 49 per cent to 33 per cent to boost incentive. It positioned the nation for decades of growth.

Mr Shorten wants Malcolm Turnbull to adopt all 50 of the Finkel report’s recommendations, including a clean energy target, under a bipartisan energy and climate policy. It is far more important, especially in light of Mr Trump’s speech in Indiana, that Labor agrees to retain the Coalition’s tax cuts, passed by the Senate in March with crossbench support, for businesses with turnovers of up to $50 million. Labor backed the cut only for companies with a $2m turnover or less. The party also should reassess and back the Prime Minister’s original proposal to decrease the rate on all companies from 30 per cent to 25 per cent by 2026. Mr Shorten’s fatuous observation post-budget that Coles was not a small business ignored the fact big businesses are big employers, subject to competitive pressures in the international economy.

One of the most constructive arguments for corporate tax cuts was made in November 2010, when an up-and-coming minister in the Gillard government said that to “keep all sectors of our economy competitive in their own global markets … we should never forget that we are just one option for international investors — we have to make sure we offer the most compelling value”. The impeccable reasoning came from the then financial services and superannuation minister. Mr Shorten should dust off those notes rather than aim to lead our biggest spending and taxing regime.

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Nobel-prize winning economist Joseph Stiglitz on how to stop inequality and tax avoidance 

Nassim Khadem, The Sydney Morning Herald, 18 September 2017 

One of the most memorable images from the 2016 US election campaign was of Donald Trump celebrating his delegate victory with McDonald's – he's eating a Big Mac and fries on his luxury private jet.  The flamboyant wealthy businessman, now US President, managed to convince ordinary Americans, discontent with the power of big corporations and globalisation, that he was a man of the people.  "They [Americans] are going to be hurt a lot by his policies," Columbia University professor and Nobel Prize-winning economist Joseph Stiglitz says.  The former World Bank chief economist and adviser to former US president Bill Clinton is bold and unorthodox, and that's part of his charm.  He isn't afraid to advocate ideas that challenge conventional thinking and to question the power of corporations.  When I ask him about how to fight global tax avoidance, he proposes a global minimum tax rate of 20 per cent.  And on the issue of climate change, he suggests that if rich high-emitting countries such as Australia and the United States don't eventually come to the table, companies should be subject to a cross-border carbon tax.  It's not that Professor Stiglitz is anti-business, but rather that he wants everyone to share from advances in technology and economic growth.  "One of the reasons for the anti-globalisation movement is that people realise that the system of globalisation has worked very well for very rich people and for the corporations, but not for individuals," he says in an exclusive interview with Fairfax Media.  A worsening divide  Trump and Brexit were a rebellious response, he says, from people who feel they have been left out. But he worries their fates will now worsen.  The general shift to right-wing leaders globally is already resulting in protectionist, anti-globalisation policies. And those policies, he says, unfortunately, are most damaging to the poor.  This is a key topic explored in Professor Stiglitz' book: Globalization and Its Discontents Revisited: Anti-Globalization in the Era of Trump.  But making the Trump-loving population understand their deteriorating plight is a hard feat.  "There's a view that they don't really look at the policies," he says. "They only look at; 'does he seem to care about us'? As a great actor, he has persuaded them he cares about them, even as he picks their pockets."   According to Washington-based Economic Policy Institute, which maps inequality across the US, between 1979 and 2007, the average income of the bottom 99 per cent of US families grew by 18.9 per cent, while the average income of the top 1 per cent grew over 10 times as much – by 200.5 per cent. It's at levels not seen since the late 1920s.  "You have a lot of inequality and inequality affects the politics; then they [Trump's administration] pass laws that reinforce inequality," Professor Stiglitz says.  He gives the example of the Republicans push to get rid of inheritance taxes. Known in the US as the estate tax, it taxes the right of an individual to transfer property at their death, which according to the IRS, now only falls only on those with assets worth more than $5.49 million and double that for couples.  "We're talking about a few thousand families with lots and lots of money," he says. "The Republican party is coming out on the side of the very, very wealthy."  'Fiscal paradises'  Tax rates and incentives can also exacerbate divides.  Trump has proposed to cut America's company tax rate from 35 per cent to 15 per cent.  In a world of greater tax competition where countries like Ireland and Singapore offer 12.5 per cent and 17 per cent rates respectively, companies say if the US doesn't cut taxes, they will move offshore.  "I think it's largely a hollow threat, but not completely," Professor Stiglitz says.  "The first tax reform we need is to get a global agreement to end the tax competition race to the bottom and make sure that there isn't massive tax avoidance. But obviously this isn't the corporate agenda- they like this race to the bottom."  Despite the OECD/G20 global plan against profit shifting, known as Base Erosion and Profit Shifting (BEPS), he says multinational tax avoidance still occurs.  "We haven't eliminated the tax havens," says Professor Stiglitz who two years ago help set up the Independent Commission for the Reform of International Corporate Taxation, ICRICT, to fight for changes that reduce inequality and strengthen human rights.  "The fiscal paradises are still there. Panama is still there. Money laundering is still going on."  Abuses continue  While BEPS eliminated some of the absolutely worst abuses, it did not eliminate many of the other bad abuses, he says. It put an end to no-tax jurisdictions, but it didn't end very-low tax jurisdictions.  He notes companies including Starbucks and Apple are still engaging in the legal practice of profit shifting to lower-tax nations.  The less revenue we raise from corporate income tax the more revenue we have to raise from individual income tax. "So, in a way you're shifting taxes [the burden] from corporations to individuals," he says.  Aside from BEPS, there's also been unilateral moves by governments – including Australia's – to try tax multinationals.  Tax experts are warning that once there's a share of the pie to tax, there will be more disputes between governments about who gets what share of that pie.  Apple's spat with the European Commission is a case in point, and US Treasury appears to be backing Apple boss Tim Cook's position that its US income.  Could this result in tax revenue wars? "That could happen if we don't get more cooperation," Professor Stiglitz says.  His solution is a global minimum corporate income tax of 20 per cent and limiting tax breaks to rare exceptions.  "I would not want to say there would be no exceptions – for example, the global community could get together and say, 'it's very important for us to encourage research in infectious diseases and give encouragement through the tax system – but basically there would be a framework that says, 'no you can't engage in tax competition through the patent box or anything'."  GFC Mark II?  The same system that has allowed zero tax rates for decades also enabled the Global Financial Crisis.  Professor Stiglitz says the financial sector never paid for the economic damage – which he estimates amounts to $US5 to $US10 trillion, and that's before the human toll is taken into account.  "They paid fines but those fines were minuscule compared to the damage that they [the financial wrongdoers] have done to our economy. [On top of that], there's he damage to peoples' lives, the loss of homes, the loss of families and the loss of jobs. It's just been a disaster.  And while there should be individual culpability, those in the big end of town escaped prosecution.   "Nobody at Goldman Sachs did the misdeeds even though misdeeds were done," he says. "Nobody at Lehman Brothers did the misdeeds even though misdeeds were done. The financial sector behaved badly but nobody did it."  The economy is "far from repaired. We don't have a robust financial system. The system is betting that we won't have another big shock. It's betting it can manage small-and-medium-sized shocks. But we know that on occasion, there's big shocks. And when the big shocks come, they know we will bail them out again."  The economy is also at risk from the impacts of climate change. Australia is a nation that went down the path of considering a carbon tax, but then retreated following a massive campaign from big business.  And in the aftermath of Trump's withdrawal of the US from the Paris accord, Professor Stiglitz, can only hope this is a "passing phenomena".  "We will have an election in 2020, and we will rejoin in 2021 – that's my hope."    Top

EU plans new tax to stop Google sending 'bags of money' offshore 

Mark Deen, Radoslov Tomek and Viktoria Dendrinou, The Australian Financial Review, 17 September 2017 

France's campaign to impose a new European Union-wide levy for digital companies such as Amazon.com Inc. and Facebook Inc.ran into early difficulties amid opposition led by Ireland  French Finance Minister Bruno Le Maire told colleagues at an EU meeting in Tallinn, Estonia, that the bloc should agree to a tax on the digital industry by mid-2018 as a matter of fairness. Ten countries, including Germany, Italy and Spain, have formally backed the initiative. Eight others have reservations, he said, led by Ireland.  "The very, very considerable difficulties in taxation of this sector" became clear at this meeting, Irish Finance Minister Paschal Donohoe told reporters on Saturday, explaining that any such levy should include the U.S. and other Group of 20 countries. Ireland joined other nations in raising "very big questions about how such a measure could be implemented," he said.  European Union finance ministers are developing a new way to tax digital companies such as Amazon.com and Facebook to raise money from an industry that they say provides less than it should to public coffers.  "We are responsible to our taxpayers to deal with it, we can't just watch how bags of money are transferred elsewhere," Slovak Finance Minister Peter Kazimir said in an interview. "I favor imposing immediate levies, similar to sales tax, but only as a temporary solution before we reach a global agreement."  Traditional taxation practices have failed to capture business from an industry where value added tends to be virtual rather than material and digital companies have sought to take advantage of loopholes created by uncoordinated European regulation.  Even as national governments accept that the current taxation system needs to be altered, the path forward is fraught with difficulties.  US involvement  "You need to know what the impact is and if it's going to change a whole system of taxation," Maltese Finance Minister Edward Scicluna said on Saturday. "One has to look at it globally rather than partially, because it involves the U.S., it involves China."  Austrian Finance Minister Hans-Joerg Schelling proposed that current discussions only apply to a temporary solution before passing that outline on to the Organization for Economic Cooperation and Development, a group that advises its 35 members on policy, for a more comprehensive fix.  The battle has intensified since the European Commission last year ordered Apple to pay as much as 13 billion euros ($15.5 billion) plus interest in back taxes, saying Dublin illegally slashed the iPhone maker's obligations to woo the company to Ireland. Apple and the Irish government are fighting the decision. In another case, Google in July won its battle against a €1.12 billion-French tax bill after a court rejected claims the search-engine giant abused loopholes to avoid paying its fair share.  Le Maire invoked the EU's need to counter anti-European political movements in his campaign for the tax, calling to mind French President Emmanuel Macron's hard-fought election victory over populist Marine Le Pen in May as a reason to accept the reform.  "Citizens in Europe are outraged by the situation," Le Maire said at a press conference in Tallinn following a meeting of EU finance ministers. "They cannot understand that such huge companies are not paying their share of tax when small companies are obliged to pay."  One challenge for France is that all 28 current members of the EU need to agree to initiatives concerning taxation, meaning one country alone could block the plan.  Dmitri Jegorov, undersecretary for tax and customs policy at the Estonian Ministry of Finance, said they're prepared to offer a two-staged approach -- that includes a quick fix as well as a longer-term solution -- in the event there's a stand-off over the proposal.  "It will be extremely difficult for anyone to say on the ministerial level that everything is just fine," Jegorov said.    Top

Scott Morrison slams property sector for wanting unfair build-to-rent tax breaks

Jacob Greber, The Australian Financial Review, 17 September 2017

Treasurer Scott Morrison has lashed out at the property sector and Labor opposition saying they are effectively demanding for developers a tax concession that would be out of reach for most other Australian investors. Speaking from China, Mr Morrison staunchly defended the government's surprise decision last week to block managed investment trusts from buying residential property except for affordable housing. "You cannot currently put residential properties in a MIT," Mr Morrison told The Australian Financial Review. "The sector is asking for a tax concession not available for Australian investors." Mr Morrison's decision was announced on Thursday and dated to take effect from 4.30pm on the same day, triggering consternation within the property industry which is eager to ramp up Australia's nascent build-to-rent sector. They say the move to limit the reach of managed investment trusts risks killing off build-to-rent development before it even starts, and will hamper the industry's ability to deliver more low-cost rental accommodation. Managed investment trusts are defined by the Australian Tax Office as a type of unit trust that invests in passive income assets such as shares, property or fixed-interest. Tax on the income from the trusts is paid directly by individual beneficiaries at their top marginal tax rates. Ken Morrison, chief executive of the Property Council of Australia, said until last Thursday property companies have been able to lodge applications to the ATO for tax rulings that build-to-rent would satisfy MIT arrangements as they are primarily about income and not capital gains. "We have seen the ATO issue individual rulings" to that effect, the property council chief executive said. "We look forward to working with the government on this issue as we believe build-to-rent offers enormous possibilities for Australia. Shadow treasury spokesman Chris Bowen on Friday slammed the move, saying the Treasurer's announcement had ambushed the property and construction sector over a potential billion dollar addition to the real estate market. The treasurer hit back over the weekend by lampooning Labor's approach to housing affordability, which he said amounted to increasing taxes "on mum and dads investing in real estate while giving foreign investors a new 50 per cent tax cut." Major players are already gearing up to roll out build-to-rent projects, which aim to service long-term renters through an institutional landlord, a model that is well established in the US and Europe. While the model promises to help address one of the greatest complaints of renters – the lack of stable long-term professional landlords and too many "cottage-industry" players – the economics of building-to-rent is not without challenge, given the collapse in rental yields in cities around the nation, but in Sydney in particular. However, industry sources say the relative declining allure of commercial property means build-to-rent has become more attractive. Capital gains are also less assured in today's high-priced market. Mirvac called late last month for interested parties to form a "club" of build-to-rent investors and commit up to $1 billion for long-term rental apartments with an expected yield of 4.5 per cent, according to Street Talk. The government said last week the MIT restriction was an "integrity measure" that would prevent trusts from investing in houses, units and apartments to hold for long-term rent. "This change provides legislative clarification of the long-standing convention that the primary purpose of the MIT concessional tax treatment is to apply to passive investment income," the Treasurer said in a statement on Thursday. "This change is crucial to maintaining the integrity of the tax base and will help direct foreign investment to where it's needed most." Top

Build to rent emerging as $300b housing industry 

Carolyn Cummins, The Sydney Morning Herald, 14 September 2017 

Build-to-rent will be a game changer for the Australian housing market as an estimated $300 billion worth of residential assets may be owned by institutional investors within the next couple of decades if the multifamily sector evolves in the same vein as the US, according to a CBRE report.  Multifamily developments are gaining traction in Australia and the major residential investors Lendlease, Mirvac and Stockland are all looking to offer the product.  While it will not be a panacea to housing affordability, the developers believe it will help first home buyers and investors with limited funds to enter the market.  CBRE's head of research for Australia Stephen McNabb said the multifamily sector represented about 15 per cent of properties with five or more units in the US, a position obtained after 25 years of growth.  In total, the sector accounts for 20 per cent to 25 per cent of the $US2 trillion in institutional property investment in the US, ranking it as the second largest investor allocation after office property.  "Factoring in that 35 per cent of Australia's population rent, if the market here evolved to the level of the US, up to 5 per cent of the country's dwelling stock by value could be institutionally owned in several decades," Mr McNabb said.  "In today's dollars, that represents about $300 billion worth of residential assets or about 300,000 apartments."  Lendlease chief executive Steve McCann said at the full year results that, while imposition of GST in Australia made it uncompetitive for developers compared with building for resale, the build-to-rent sector was emerging as a new asset class.  "The units-to-rent sector is one we are entering as it is well established in the US and London," Mr McCann said. "It provides a potential new asset class in our investment segment.  "In Australia, it is a possible product for us, but there are tax issues that make it a challenge. The sector needs government support to make it viable."  Knight Frank's director of research and consulting in Australia Paul Savitz has predicted that, during the next five years, it is expected that close to 40,000 purpose-built student accommodation (PBSA) beds across Australia will be developed, as both domestic and global institutions awaken to the potential of this maturing investment class.  "For those ineligible for affordable housing, or for those unable or unwilling to enter the owner-occupier market, there has been a reliance on small-scale, largely unregulated 'amateur mum and dad landlords' who either rent out their own former homes or accumulated portfolios of properties," Mr Savitz said.  "The professional, large-scale institutions now focusing on this new investment asset class are looking to build and construct, keeping these dwellings for the long term, and harvesting the income from rents, in the same way as the new wave of PBSA institutions are operating."  Mr McNabb said while build-to-rent would take pressure off existing housing stock, it would not, by itself, be a panacea for housing affordability.  "There will, however, be economic benefits in reducing household debt and the potential to transform financing of the sector away from traditional intermediated finance for development and end-product purchasers," Mr McNabb said.  New funds  "The federal government would need to consider how zoning and tax changes can provide certainty to the asset class."  Mirvac has already forged a path with the engagement of UBS to launch a build-to-rent apartment vehicle with a potential value of $750 million.   Susan Lloyd-Hurwitz, chief executive of Mirvac, said she saw an opportunity for an institutional rental market to operate in Australia and "we are currently preparing to invite investors to join us in the opportunity".  "Build-to-rent can provide secure, quality, long-term and professionally-managed rental accommodation in key urban locations providing people with this choice and security," Ms Lloyd-Hurwitz said.  Mirvac will create a fund for its "Liv by Mirvac" platform, which will start with a complex in Sydney Olympic Park then expand with demand.  Funding will be another key consideration, according to Simon Cowley of CBRE's debt and structured finance team.  "In the early phases, the capital stack will be formed mainly through equity rather than debt," Mr Cowley said.  "It will entail institutional investment via either the forward-funding or forward-commitment route, via joint ventures with developers and through partnering with asset managers with expertise in this sector."  Frank Lowy's Westfield is also teaming up with apartment operator Greystar to launch its first residential tower in San Diego in the US as it enters the build-to-rent apartment sector.  Westfield has indicated it will pursue build-to-rent schemes in both US and Britain, and the project at its Westfield UTC mall in San Diego is the first to launch. Greystar, based in South Carolina, is the largest apartment operator globally and runs more than 415,000 units in about 140 cities.  Top

OECD urges rich nations like Australia to address income inequality 

Nassim Khadem, The Sydney Morning Herald, 14 September 2017 

Australia would benefit from cutting personal income tax and addressing high levels of income and wealth inequality, a new Organisation for Economic Cooperation and Development (OECD) report shows. The Paris-based think tank examined rich countries' approaches to tax reform and found that while nations had moved to cut corporate taxes not enough was being done to reduce the divide between the rich and poor. Inequality of market incomes (before taxes and transfers) has continued to increase slightly since the global financial crisis on average in OECD countries, it said, with 20 out of 33 countries examined reporting an increase. This has worsened the drag on economy-wide household spending, it said. Need for inclusiveness While a number of countries have embarked on reforms aimed at "fostering inclusiveness" and lowering personal income taxes on low and middle income earners and on families, Australia has not. Instead, Prime Minister Malcolm Turnbull's signature tax reform plan focused on company tax cuts. The OECD's head of tax policy Pascal Saint Amans told Fairfax Media that while the report's aim was not to assess the tax policy merits of specific measures in countries, Australia could benefit if it moved down the same path of also handing down personal tax cuts. "Tax cuts to low and middle income earners, in particular, can be an important way of supporting increased labour market participation and stronger economic growth," he said. "Well targeted tax cuts can also play an important role in promoting more inclusive growth." The report said in some countries there had been moves to shift the tax burden on capital income from the corporate to the personal level, "which is likely to have positive effects on both equity and growth". Redistribute wealth? "Tax reforms that contribute to strengthening progressivity and redistribution will play a key role in addressing today's high levels of income and wealth inequality and in bridging the divide between those who have benefited from growth and those who have not," the report said. Labor's Andrew Leigh said: "Since the mid-1970s, earnings have risen three times as fast for the top tenth of Australian workers as for the bottom tenth. The labour share in the economy is at a four-decade low, and the home ownership rate is at a six-decade low. We want tax cuts for low and middle income earning Australians, not the big end of town." But low growth rates, coupled with improvements in public budgets, have pushed many countries to cut corporate income tax rates. The think tank said continuing reductions in corporate tax rates had lowered the average across its 35 members to 24.7 per cent in 2016 (from 32.2 per cent in 2000). Eight countries reduced their corporate tax rates in 2017, with cuts averaging 2.7 percentage points. And three announced forthcoming tax cuts, including Australia (with planned cuts from 30 per cent to 25 per cent), Britain and France. Tax competition intensifies US President Donald Trump has also signalled he wants to cut America's corporate tax rate to 15 per cent, which will further intensify tax competition. The OECD's report said competition on corporate tax rates was intensifying, partly as a response to weak investment. There was also evidence of increased competition through new or enhanced tax incentives for R&D and intellectual property related activities, it said. The report also looked at measures governments have implemented to tackle tax avoidance, following its global plan to fight the problem known as, Base Erosion and Profit Shifting (BEPS). It says the Turnbull government's Diverted Profits Tax ( DPT), also dubbed as the Google tax, "acts as a deterrent aimed at increasing corporate income tax revenues as well as preventing tax avoidance". But tax experts warn DPT could also create revenue disputes between taxing authorities, including the United States and Australia. 'Uncertain' tax outcomes Mr Saint-Amans said "in relation to Australia's Diverted Profits Tax, we have previously said that we discourage countries from taking unilateral actions such as these". "Where countries implement unilateral and uncoordinated measures this can give rise to greater uncertainty in tax outcomes," he said. Mr Saint-Amans said the report did show a trend of countries around the world cutting corporate income tax. "This is largely driven by a desire to maintain competitiveness, attract investment, create jobs and boost growth," he said. "In the case of Australia, its current corporate income tax rate rate remains above the OECD average and its revenues from corporate income tax – as a share of total revenues – are higher than most OECD countries. " Angel Gurría, secretary-general of the OECD, said the increase in corporate tax competition "raises challenging questions for governments seeking to strike the right balance between maintaining a competitive tax system and ensuring they continue to raise the revenues necessary to fund vital public services, social programmes and infrastructure". Top

Poor gain as inequality narrows 

David Uren, The Australian, 13 September 2017 

 The poor have done well over the past six years, gaining the fastest income growth as measures of ­inequality have declined.  Countering Bill Shorten’s narrative that inequality is increasing, all income groups are better off now than they were six years ago, with Australian Bureau of Statistics surveys of income and spending showing that household earnings have outstripped inflation.  For the poorest fifth of the population, incomes have risen 24.2 per cent since 2009-10 while the next poorest fifth are earning 20.7 per cent more. At the other end of the income spectrum, the top-earning fifth of the population have seen their wages rise 19.1 per cent while the next top quintile earns 18 per cent more.  The faster pace of income growth among the poorest households partly reflects big rises in pension rates under the former Labor government.  Although income inequality is higher now than it was in the 1980s, the ABS survey shows it peaked in 2007-08, when people in the highest income quintile were earning an average of 4.35 times the income of those in the lowest quintile. That share has dropped to 3.91 times, which is no higher than it was 15 years ago.  The ABS survey shows that living costs overall have risen 15.2 per cent since 2009-10, which is about four percentage points fewer than the rise in incomes.  However, the gains for the poor have been much greater, with spending costs rising only 13.1 per cent over the six-year ­period, or 11 percentage points lower than their income growth.  Spending for high-income earners has risen much more rapidly, increasing 19.1 per cent, exactly matching the increase in their incomes.  The improved standard of living for those on the lowest ­incomes is underlined by fewer people reporting financial stress. The ABS looks at a series of indicators of stress, such as whether people cannot pay utility bills, have gone without meals, have sought financial assistance from friends or are unable to heat their home. The number reporting no indicator of financial stress has risen from 54 per cent to 59 per cent.  By far the fastest-rising living cost has been income-tax payments to the federal government, which are 47.3 per cent higher than they were six years ago. Tax has risen at more than double the pace of income growth, boosted by the growing share of incomes caught by higher tax brackets.  On average, people are spending $123 more on tax each week than they were six years ago, which compares with a $188 rise in the average weekly cost of all household goods and services.  These averages conceal huge variation. Most people in the poorest 20 per cent of the population are outside the income tax net, while those in the second quintile pay an average of only $54 a week.  This rises to an average of $1216 a week for those in the top quintile of income earners.  Housing has been the other big cost increase, costing an average $56 a week more than six years ago, as rising prices force home buyers to take on more debt.  Including households with no borrowings, the average debt is equal to average income, up from 89 per cent six years ago.  The share of households with debts more than three times their annual incomes has risen from 24.2 per cent to 27.2 per cent in that period.  However, the ABS finds that only 4 per cent of households are over-indebted, carrying debts that are greater than 75 per cent of their assets.  Top

Bill to hike Medicare levy to raise $8 billion NDIS funding set to face Parliament

Caitlyn Gribbin, ABC News, 17 August 2017

A bill to increase the Medicare levy and raise $8 billion to fund the National Disability Insurance Scheme (NDIS) will be introduced to Parliament today. The levy is a charge paid by most taxpayers to fund Australia's public health system and the Government wants to increase it from 2 per cent to 2.5 per cent. The Coalition will introduce the bill to the House of Representatives today, but it will need to convince the Senate to pass it. The rise is due to come in from July 2019, and the money raised would go toward fully funding the NDIS, which is facing a multi-million-dollar funding black hole. But Labor will only support the increase for Australians earning more than $87,000 a year, arguing high-income earners must pay a greater contribution. The Coalition is continuing negotiations with the Greens and Senate crossbenchers. Senator Derryn Hinch is on board with the changes, while the Nick Xenophon Team and One Nation said they were still in discussions with the Government. The levy increase would equate to an extra $375 a year for those earning $75,000. Treasurer Scott Morrison has previously said the Government would not engage in horse-trading to get the bill through Parliament. The Opposition has continued to insist the Coalition should instead abandon its planned corporate tax cuts, and extend a temporary deficit levy on high-income earners, which is due to expire this year. Top

Senators negotiate Medicare levy hike

Cameron Stewart, The Australian, 17 August 2017

Negotiations with the Greens and key Senate crossbenchers have given the federal government confidence it can hike the Medicare levy to fund the national disability insurance scheme. But the Greens say they're yet to have any party room discussion on the issue. As well, independent Jacqui Lambie says she's still talking with Treasurer Scott Morrison about the income level at which a rise from 2 per cent to 2.5 will kick in. "I want the NDIS and I have no problem with the 0.5 per cent, it's at where do we start," she told ABC radio on Thursday. Senator Lambie doesn't like the government's position of having those earning $28,000 a year paying an extra $75. But she believes Labor's compromise of having the levy rise begin for those earning more than $87,000 a year is too high. "I think we can find some middle ground here," she said. Greens MP Adam Bandt said reports Mr Morrison was confident a deal was imminent was news to the minor party. "The Medicare levy and any proposed deal haven't been the subject of discussion in our party room," he told reporters in Canberra. Ahead of introducing the legislation in parliament on Thursday, Mr Morrison called for bipartisanship to help Australians with disabilities and their families. But he stressed having different cut-in rates for the increased levy risked the integrity of the tax system. "When you try and make the Medicare levy a progressive tax, you create real complexities," he told reporters in Canberra. "People will lose an incentive to earn more in that situation because if they're on $87,002 then they're paying an extra levy for their entire income," he said. Top

Treasurer Scott Morrison confident of shock Medicare levy deal with Senate

James Massola, The Sydney Morning Herald, 16 August 2017

The Turnbull government is optimistic it can strike a shock deal with the Senate crossbench and pass the $7.8 billion Medicare levy, one of the centrepiece measures of the 2017 budget. In a move that defies predictions the 0.5 per cent levy rise would stall in the Senate - and possibly be put on ice until after the next federal election - Treasurer Scott Morrison will on Thursday bring the bill to the Parliament. The 0.5 per cent levy rise is supposed to start from July 1, 2019 and is designed to help fill the 10-year, $55.7 billion funding shortfall for the National Disability Insurance Scheme. Mr Morrison has led behind the scenes negotiations with the Greens and members of the Senate crossbench in recent weeks and senior government sources said those meetings had been very "constructive" and the prospect of a deal was a "live option". The introduction of the legislation is a clear sign of the federal government's confidence it can secure the votes it needs in the Senate. Despite the five current absences from the Senate because of the citizenship crisis, illness and retirement, the government must secure the four votes from Pauline Hanson's One Nation, three votes from the Xenophon Team and three of the five other crossbenchers. Alternatively, a deal with the Greens and one more senator would suffice, because of pairing arrangements. Government sources said they were confident "we have a couple of different paths to victory here". Mr Morrison told Fairfax Media on Wednesday evening the NDIS had enjoyed bipartisan support from its inception because all parties recognised "the need for this vital service and the importance of caring for those who need it the most". "The only thing we have not agreed on is funding the program," he said. "Now is the time to finish what has been started, and fully fund the NDIS once and for all. The Turnbull government chose the Medicare levy, asking most Australians to contribute according to their means - because this is the responsibility of all of us." "A few years ago, Bill Shorten asked Australians to do the very same thing, and contribute to the NDIS by a 0.5 per cent increase in the Medicare levy. He voted 'yes' then, and now he wants to vote 'no' to suit his political agenda, pitting Australians against Australians." Mr Morrison said Labor should "do the right thing" and back the legislation, but this is unlikely to happen as Labor has said it will only support the rise for taxpayers in the top two tax brackets - that is, people earning more than $87,000 a year - and argued it is unfair to raise taxes on singles earning as little as $21,655 and families earning $36,541. Labor adopted this position despite a split in the shadow cabinet, revealed by Fairfax Media in May. The Greens raised similar concerns to Labor back in May, as did senator Nick Xenophon, while Senator Hanson said she was not convinced the extra money raised would fund the NDIS. The government believes, however, it will be able to put these concerns to bed. According to figures from the Treasurer's office, based on data from the Australian Tax Office, it is not necessarily the case that any single person earning more than $22,000 will be hit by the Medicare levy rise. According to the data, about 9 million adult Australians don't pay the Medicare levy. A single parent earning less than $49,871, a pensioner on less than $42,806 or families with three kids on less than $57,399 pay a reduced rate of Medicare levy, or even no levy at all, because of various exemptions and protections. Top

Australian wages stall at record low of 1.9 per cent

Eryk Bagshaw, The Sydney Morning Herald, 16 August 2017

The wages of working Australians are going nowhere, new figures show, stalling at a record low while the earnings of more than 10 million private sector employees fall below the cost of living. The figures, published by the Australian Bureau of Statistics on Wednesday, show wages grew by just 0.5 per cent in the June quarter, or 1.9 per cent over the year, placing mounting pressure on household budgets. The result also means the Turnbull government is now barely keeping up with its budget forecast of a 2 per cent wage rise, a figure it is banking on to return to surplus by 2020-21. It has fallen well short the 2.5 per cent rise it forecast for the year to June in the 2016 budget. The private sector's 0.4 per cent growth for the three months to March is the weakest result since the global financial crisis, with only healthcare and education workers recording a rise much above inflation. Overall, wage growth for private employees slowed to just 1.8 per cent, below the cost of living of 1.9 per cent for the year to June, while the wages of public sector workers grew by 2.5 per cent. The Bureau's chief economist Bruce Hockman said the low wage growth was partly a result of continuing underemployment. "Underemployment is an indicator of spare capacity in the labour market and a key contributor to ongoing low wages growth," he said. Treasurer Scott Morrison has repeatedly said Australians would "see better days ahead" on the back of record jobs growth, echoing the sentiments of Reserve Bank Governor Philip Lowe. "With the strongest jobs growth since before the financial crisis of 240,000 jobs it is important that we continue to make the right choices to see these results flow into wages," he said. Labor's employment spokesman Brendan O'Connor said Mr Morrison had scored the trifecta of flat wage growth, the proliferation of insecure work, and a falling share of GDP accruing to employees. Mr Morrison said wages wouldn't improve by increasing taxes on business. "Your wage is not going to go up by Bill Shorten taxing someone else's wage more," he said. "Labor's plan to increase the tax burden is driven by pursuing the politics of envy not the economics of opportunity." Goldman Sachs economist Andrew Boak said he believed the peak disinflationary period for wages had passed on the back of the 3.3 per cent increase in the minimum wage, a 33-year high in corporate profits and the longest continued expansion in jobs growth since 2011. But the best-performing states of NSW and Victoria continued to record disappointing wage growth, bucking the widely held theory that near-full employment would lift wages. "The weakness in annual wage growth wis once again broad-based across the states and sectors" said Capital Economics chief economist Paul Dales. "In other words, hardly anyone is escaping the low wage problem," he said. Top