Archive: May 2013

This section provides a selection of media items from the May 2013.


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GLOBAL PLAN NEEDED TO END CORPORATE TAX HAVEN HOLIDAYS

Mike Steketee, The Drum, 31 May 2013

The more elusive the tax liabilities of global companies, the more aggressive many of them have become in their practices. Global cooperation on corporate regulations is the only way to solve the problem, writes Mike Steketee.
If I said Barbados, Bermuda and the British Virgin Islands were powerhouses of the world economy, you might be a little sceptical.
So here are the figures: in 2010, these three countries together received more foreign direct investment than Germany or Japan, according to the International Monetary Fund. Moreover, these tropical idylls were also big investors overseas. Each was amongst the top five countries making investments in Russia in 2010. The British Virgin Islands alone were the second largest investor in China after Hong Kong and 3.5 times bigger than the US.
Yes, tax or the lack of it has everything to do with it. The international management consultancy Oliver Wyman estimated in 2008 that the assets deposited in tax havens around the world totalled $10 trillion. A report released this week by the Uniting Church’s Justice and International Mission says 61 of the Australian Stock Exchange’s list of 100 publicly traded companies have subsidiaries in tax havens that explicitly offer secrecy for non-residents.
According to expert evidence before a US Senate subcommittee last week, $22 billion or 64 per cent of Apple’s pre-tax income was recorded in Ireland in 2011, saving $7.7 billion in US taxes. The overall effective tax rate on Apple’s foreign earnings was 2.5 per cent, the subcommittee heard. In Australia, Labor MP Ed Husic told parliament Apple Australia paid $40 million in tax on $6 billion in revenue it generated last year. That did not stop it charging Australian customers much higher prices than in the US.
Google says its annual income tax bill in Australia was $781,471, refuting a report that it was 10 times lower. Compared to estimates of annual advertising revenue from Australia of between $1 billion and $2 billion, it still is not much. Google makes use of the lyrically named Double Irish Dutch Sandwich. Although they may not be aware of it, Australians have been buying their Google ads from a subsidiary in Ireland, which has a company tax rate of 12.5 per cent, compared to Australia’s 30 per cent. The Irish subsidiary pays a royalty to a Dutch subsidiary, thus reducing its already low Irish tax liability. The Dutch subsidiary passes the money on to another subsidiary controlled in Bermuda, which has no company tax. The Dutch do not charge withholding tax on the transactions for which Google would be liable in other countries.
It is not just technology companies that are using such exotic merry-go-rounds. According to evidence to the UK Parliament’s Public Accounts Committee, Starbucks paid no taxes in Britain for three years, despite sales totalling 1.2 billion pounds. Most people think Starbucks makes money from its coffee but it attributes most of its profits to its intellectual property in the form of its brand name.
There is nothing illegal about any of these activities, according to the best advice these companies have obtained. And therein lies the problem.
Corporate tax avoidance has been with us at least since companies started operating across borders 400 or so years ago. In the 1920s, government concerns about its growing scale led to measures to address it. But they seldom have been able to keep up with the changing nature of global business, let alone the ingenuity of tax lawyers and accountants.
The more elusive the tax liabilities of global companies, the more aggressive many of them have become in their practices. Tax authorities generally can determine the true value of transactions when they involve goods and commodities produced in a particular country. It is much harder to do so when the assets are intangible, such as software, patents, copyright or the Starbucks’ brand. Their home can be anywhere and so can the profits attributed to them.
Against the might of multinationals, governments often look puny. Assistant Treasurer David Bradbury assured us this week that “the Gillard Government is committed to ensuring that large multinational companies pay their fair share of tax so that families, pensioners and small businesses do not have to take on a higher burden of taxation in the future”. The action to accompany the words came in the form of legislation requiring the Australian Taxation Office to publish how much tax is paid by companies with an annual income of $100 million or more. “Improving the transparency around the tax payable by large corporate entities will help to inform the debate and discourage aggressive tax minimisation practices,” says Bradbury. Good luck with that.
The Government has taken other measures, including strengthening catch-all anti-tax avoidance provisions, tightening rules to stop companies loading up their Australian operations with debt to avoid tax and negotiating a tax treaty with Switzerland to overcome its secrecy provisions.
According to Rick Krever, director of Monash University’s Taxation Law and Policy Research Institute, these measures address the symptoms rather than the real problem. “They are tinkering around the edges,” he tells The Drum. “Until governments start cooperating in the same way corporations do across borders, making decisions across the entire world, we will always be behind.”
Governments everywhere are facing the pressure of slowing revenues, increasing the will to act. In July, the OECD will present a draft action plan on profit shifting and the eroding tax base to G20 finance ministers. But they are starting from a long way behind. And Barbados, Bermuda and the British Virgin Islands are not in the G20.

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OECD PREPARES NEW RULES TO LIMIT CORPORATE TAX AVOIDANCE

Phillip Inman, The Guardian, 31 May 2013

The OECD is to draw up new rules to limit tax avoidance by some of the world’s largest businesses in time for a meeting of the G20 group of nations in July.
The Paris-based thinktank said all its 34 members backed proposals to crack down on schemes that allow multinational firms to pay as little as 1% tax on their profits.
At the OECD’s annual conference, secretary general Ángel Gurría said there was widespread commitment to design a system that allowed countries to collect the taxes set by their governments.
The agreement comes after increasing controversy over the tactics used by firms such as Amazon, Apple and Facebook to avoid taxes in Europe, where they make billions of pounds’ worth of sales. Apple boss Tim Cook was confronted by US senators in a congressional hearing last week over the company’s use of Ireland as the centre of its tax arrangements. Almost two-thirds of Apple’s $34bn (£22.5bn) profits for 2011 were earned by companies registered in Cork.
The OECD is expected to present the G20 meeting of finance ministers in July with an outline plan for assessing the level of tax companies should pay before giving a more comprehensive blueprint next year.
Gurría said: “This is a very challenging piece of work. We have created a regime where it is legal to pay no or little taxes. But I’m very confident we can find a formula that provides a level playing field.”
In a communique agreed by OECD members, the thinktank said profit-shifting by large companies was “a serious risk to tax revenues, tax sovereignty and the trust in the integrity of tax systems of all countries that may have a negative impact on investment, services and competition, and thus on growth and employment globally”.
Sigbjørn Johnsen, Norway’s finance minister, said: “It used to be that we had treaties to stop double taxation, but now we have seen these treaties allow double no-taxation. It is an issue we are committed to addressing. This is a moving train: it is on the rails and it cannot be stopped.
“The OECD has proved its competence in this area. Tax agreements concerning tax havens were absent only a few years ago, but new countries are signing up all the time to transparency agreements. There is no reason why we cannot achieve the same in respect of tax-base erosion and profit-shifting.”
Tax avoidance is also expected to be a key debate at the G8 group of nations summit to be held in Northern Ireland in June, after David Cameron said tactics used by large multinationals to dodge taxes were a serious threat to the exchequer.
Pascal Saint-Amans, head of tax policy at the OECD, said his organisation would tackle the way companies charged subsidiaries royalty payments to avoid taxes in the UK and other jurisdictions. He added that there should also be new rules governing how much debt is loaded on subsidiaries with the specific aim of avoiding taxes.
“We have to ask: is the royalty too high and is it going to the wrong place?” Saint-Amans said. “A royalty should be charged from the place where it was developed.”
If Google was forced to charge royalties from its California base rather than its offices in Ireland, it would be forced to pay the US government’s 35% tax rate.
He said he was optimistic that G20 finance ministers could reach a consensus based on plans put forward by the OECD.
“It is a very ambitious project. We have put ourselves under terrible pressure, but I believe it is achievable,” he said.

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SALVOS FIRED AT CHARITIES

David Renner, Online Opinion, 30 May 2013

As the Coalition gears up for government in September, and amidst the eagerness to reduce budget deficits, it was only a matter of time before the social sector was in the sights of small government apologists. Four major accusations are being used to question the funding of the social sector. These shots are wide of the mark, and deserve a critical response.
Claim 1: ‘Charities are too highly government funded’
The first claim is that social organisations should get less money from government and more from donations. The challenge is: who is going to give it? Only 10% of financial donations in Australia goes to social and community services (the rest goes to sports, arts, health, churches, etc.) – that’s a mere $570m or so, out of a nearly $1.3 trillion dollar annual GDP, about one twentieth of one percent. Each person in Australia buys the equivalent of 4 editions of the Big Issue, and that’s it, we’re done giving to social organisations for the year. (Source: FAHCSIA (2005) Giving Australia; RBA)
Those worried about the proportion of government funding for the social and community sector would be well advised to spend their efforts on raising the percentage of individual and corporate incomes donated to social organisations. The ethicist Peter Singer in his book ‘The Life You Can Save’ suggests about 2-5% of income for middle income families should be donated (http://www.thelifeyoucansave.org) – yet the average family is far from this level.
In addition, funding to social organisations from governments is not via donation, but through precise contracts to deliver services. Over time, social organisations have proven they are often better (cheaper, more effective and accountable) at delivering social services than government departments delivering those services themselves.
Claim 2: ‘Charities lobby government for more government’
Critics of charities have claimed that the purpose of charities’ advocacy is to increase government spending. This is an ill-informed view. The social sector’s main advocacy is about the natureof social policy – the laws and processes government should put in place to the benefit of vulnerable people such as improving child protection systems for the benefit of children, or reducing service duplication. Some advocacy is about arguing for a greater allocationof funds to social causes, for example to address mental health or homelessness. Often the social sector argues for lessgovernment through consolidation of state laws, e.g. through the Australian Charities and Not-for-Profits Commission – the intent is to have one regulator, reducinggovernment and cost.
Claim 3: ‘Some do little or no charity work’
Small government apologists are worried that some social organisations don’t deliver direct services to people in need, but do advocacy instead. First of all, a pure advocacy organisation does not receive DGR status (tax deductibility for donations), so many survive off membership income and volunteer effort, not donations. The recent Aid/Watch High Court decision recognises that advocacy is a legitimate part of social service (or ‘charity’) work. ‘Speaking truth to power’ has a long and distinguished tradition, from the anti-slavery movement, to universal suffrage, to transparency in government. Excluding social organisations from advocating for system improvements would be anti-democratic and would lead to poorer outcomes for disadvantaged people. A strong social sector that speaks its mind is a check on misuse of government power and poor resource allocation decisions.
Claim 4: ‘Some charities do little good’
This final claim is easy to make because it is so hard to verify. Certainly many social organisations have a huge impact, and some less so – the challenge is to know which ones provide the best solutions to which problems. And it is in the interests of the best social organisations and funders to prove this.
In contrast to commercial measures of outcome (e.g. sales and market share as a measure of consumer preference), social outcomes are fiendishly difficult to measure. This is not to say we shouldn’t try and measure them – on the contrary, measuring social outcomes is one of the most important tasks for progress in the social sector. Experiments with new funding vehicles such as social impact bonds are being watched with great interest. Innovative social financiers like Foresters and research bodies like the Centre for Social Impact, among others, are experimenting with and sharing improvements in outcome measurement.
The holy grail is to be able to measure the marginal benefits of one service solution (regardless of who provides it) compared to the next best solution. Donors and governments want to know where they can put their dollar that has the highest marginal benefit for a given social problem. Once we know that, the social services will start to emulate the clear feedback loop that exists in commercial markets. Money will flow to the highest impact programs, increasing overall impact for a given funding stream.
So, while most charities do great work, we need more effort (and dare we say, funding) on innovation and measurement to help improve productivity in the social sector.
In a world of budget deficit combat, those working for better outcomes for disadvantaged people will increasingly be called on to justify their funding and tax benefits. The social sector will need to defend itself and the value it creates with one hand, while working hard to improve its measurable social impact with the other.

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COALITION AGREES TO FAMILY TAX BENEFIT INCREASE

Daniel Hurst, The Sydney Morning Herald, 29 May 2013

The Coalition will support the planned increase in family benefit payments to replace the baby bonus, in a shift from shadow treasurer Joe Hockey’s stance last week.
The Gillard government announced in the federal budget earlier this month it would axe the baby bonus and replace it with an increase in the family tax payments.
A spokesman for shadow families minister Kevin Andrews confirmed on Wednesday the Coalition would ”not oppose” the government’s bill to increase Family Tax Benefit (A).
While the Coalition indicated it would support the abolition of the baby bonus in the day after the budget, it was unclear whether it would support the changes in their entirety.
Mr Hockey signalled last week the Coalition’s opposition to the increase.
”Well, as Tony Abbott said on Thursday night, we will not support new spending measures from the Labor government other than those we specifically identify, and that is not on the list,” Mr Hockey told ABC’s AM program on Monday last week.
Deputy Prime Minister Wayne Swan said it was clear Mr Hockey had been rolled by Mr Andrews.
”After spreading lies about ‘budget emergencies’, Mr Hockey has shown once again he doesn’t carry any weight in his party room,” Mr Swan said.
”He’ll say and do anything to get the front page of the paper, but the fact he gets rolled time and time again shows he doesn’t have the respect of his colleagues.”
Mr Swan said the day after Mr Hockey claimed an increase in the Medicare Levy to fund DisabilityCare Australia would hurt the economy, Mr Abbott signed up to it.
Labor announced in the budget that from March 1 next year, the baby bonus – first introduced by the Howard government – would be replaced by increase in Family Tax Benefit (A).
Under the current baby bonus, stay-at-home mothers in families with incomes of up to $150,000 get paid $5000 for the birth of each child.
Labor wants to reduce those payments to $2000 for the first child and $1000 for each subsequent child.
Labor has also changed the eligibility. Under the new arrangement, the threshold would be about $101,000 in family income for first child payments and the cut-off for a second baby would be about $112,000.
Comment has being sought from Mr Hockey’s office.

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OECD UNDER PRESSURE TO DEVISE NEW CORPORATE TAX REGIME


Phillip Inman, The Guardian, 29 May 2013

The pressure is on OECD secretary-general Angel Gurría to formulate a taxpayers’ charter that resolves the current disputes over corporation tax payments.
The Paris-based thinktank has accepted various duties over the years, and co-ordinating international tax agreements is one of them.
On Wednesday all eyes will be on its HQ near the Eiffel Tower, where it is expected to publish its latest paper on the subject, and, within its wordy shell, present a coherent strategy.
Google boss Eric Schmidt claims all he wants is a level playing field. He says his firm must play the system to minimise tax and use every available lever to please its shareholders. Only when the rules clearly stop him will he resist the temptation to end his tax dodging ways.
The problem centres on the role royalties play in international company structures. At the moment Google can charge its various subsidiaries a royalty for using its brand and a host of other goodies developed in California. Stopping this legitimate practice is going to be difficult.
In the past the OECD has proposed moving away from corporation tax in favour of sales taxes and wealth taxes, which would apply to a good deal of the assets and transactions carried out by corporations such as Google.
But whatever scheme is devised will need to win international support. Just a couple of weak links would undermine the entire project. Ireland, for instance, is unapologetic, despite the many recent examples that show US companies fail to even pay the 12.5% corporation tax Dublin charges. Turkey has long given up any pretence of charging foreign companies corporation tax. Even manufacturers can escape as long as they export their goods.
For every country that can say it is tough on international businesses, such as Norway, there are 10 that turn a blind eye.

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BUSINESS HYPOCRITICAL ON GOVERNMENT DEBT

David Richardson, Online Opinion, 29 May 2013

The Chicken Littles are at it again – scaring us about the level of government debt and the deficits that bring about debt.
Gina Rinehart has claimed that the present level of government debt ‘is simply unsustainable’ and that ‘Australia had to take action to avoid following Europe into economic misery’.
Ms Rinehart should know all about debt. She is busily trying to raise $7 billion in debt finance for the Roy Hill project.
Don Argus, described in one report as a ‘corporate veteran’ has warned that Australia is in dire need of a productivity boost if it is to offset fast-growing gross national debt and he also warned that ‘Australia was set to inherit the same challenges confronting stricken economies elsewhere in the developed world’.
That is the same Don Argus who was once chair of the board of the National Australia Bank. Again, Mr Argus should know about debt. On the latest figures the NAB had total debt of $345 billion, well above the government debt expected in June this year at $162 billion, or 11 per cent of GDP.
There is of course no reason to suppose that the NAB is in any difficulty, that’s just what banks do. They borrow in order to lend, and as long it’s done prudently there is nothing wrong with borrowing. Likewise, that is what governments should do. Borrow when they need to go into deficit for the health of the economy, and repay debt if they need to offset unhealthy booms.
Against that, the Business Council of Australia’s agenda has long been to lower debt and it claims ‘we need a plan to build sustainable surpluses for the future so we can pay down debt’. We rarely ask why government should repay debt. Westpac, formerly the Bank of New South Wales has been around for almost 200 years and it never saw fit to pay off its debt which now stands at $450 billion. OK that’s a bank and they are different, but BHP Billiton in one form or another has been around for over 150 years and still owes $62 billion, according to last year’s annual report. Nobody complains about the morality of BHP Billiton for spending its money on its shareholders rather than repaying debt. But governments are supposed to have some moral objective involving a debt reduction strategy.
The resident pet shop parrot says debt is too high, but let’s ask who is being hurt by the high levels of debt? How are they being hurt? And how will they be made worse if that debt increases a bit? It’s hard to think of anyone who is likely to be worse off, even in principle. But we can easily discover people who cannot find work in the areas of Queensland dependent on tourism, manufacturing workers who have been put off and young people working part-time in dead-end jobs around the country. These people can be helped by government spending and others such as the disabled can be assisted if we get the direction of spending right.
One of the reasons the Reserve Bank lowered interest rates was because growth was expected to be below trend in 2013 in part because of ‘fiscal consolidation’ which is Reserve Bank code for contractionary fiscal policy. That should be a warning. The quest for a surplus is inappropriate at a time when unemployment is at its post-global-financial-crisis peak and expected to continue upward over the forecast years. If anything, monetary and fiscal policy should be mutually supportive.
Many people are doing it tough as the mining sector squeezes out the rest of the economy and people are being put off work, and those that remain tend to be working more part-time hours. When the mining boom inevitably busts, government stimulus will be required to restore something like present levels of unemployment. When that time comes the government will need to act quickly, but the rhetoric about committing to surpluses will work against the use of appropriate policies, no matter who wins the September election.

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INCOME INEQUALITY GETS WORSE WHEN YOU SLASH TAXES ON THE RICH: STUDY

Mark Gongloff, The Huffington Post, 28 May 2013

The rich just keep getting richer — not only by gobbling up more income, but also by paying less in taxes. That means less support for the poor, who are getting increasingly poorer relative to the top one percent.
One chart in a new study of income inequality in developed nations, published by the National Bureau of Economic Research, puts this in stark relief. It shows that the more top tax rates are cut, the greater the share of national income that is mopped up by the wealthiest citizens.
And of course perhaps no country illustrates this better than the United States, which is at the extremes of income inequality and tax cuts for the wealthy. The only other nation that even comes close is the United Kingdom, which was hijacked by “trickle-down economics” at about the same time as the U.S., back in the 1980s under Reagan and Thatcher.
The U.K. has cut top tax rates more aggressively than the U.S. in the past few decades, but the U.S. still has a lower top marginal income tax rate — 35 percent, compared to 50 percent in the U.K. And income inequality is far worse in the U.S., where the top one percent of households gets a fifth of all the nation’s income. In the U.K., the income share of the top one percent is less than 15 percent.
Slashing top tax rates has had none of the positive effects on economic growth that the supply-side economists promised us, the NBER paper points out. Instead, it has just worsened income inequality.
There are other factors driving income disparity, including a rise in investment income (think stock dividends) compared to earned income (think wages). The recently soaring stock market, helped along by the Federal Reserve, is only pushing investment income higher. Wage income, in contrast, has been stagnant — making income inequality even worse.
As if that weren’t enough, investment income is typically taxed at lower rates, further amplifying the disparity. Mitt Romney isn’t paying 35 percent on most of his income. He’s calling his private-equity income “carried interest” and paying just 15 percent on it.
While Congress frantically finds ways to slash spending to close budget deficits, it has shown little interest in tweaking the tax code to make it more fair. Efforts to impose a minimum tax on millionaires, as Warren Buffett has suggested, have gone nowhere, as have efforts to do away with low carried-interest income tax rates. President Obama this year made permanent many of the top-rate tax cuts of President George W. Bush, while a payroll-tax cut that most benefited the poor was allowed to expire.
Similarly, U.S. companies aren’t paying anywhere near the 35 percent statutory tax rate they complain about all the time, pushing for even lower rates. They shelter their income offshore and find other loopholes to slash their tax bill, helping reduce the share they contribute to federal coffers.
With corporations and the wealthy paying less and less of their share, the burden of protecting society’s most vulnerable is falling more and more to the people who can afford it least.

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COALITION TO FIGHT TAX-DEDUCTIBLE ETHICS DONATIONS

Josephine Tovey, The Sydney Morning Herald, 28 May 2013

The Coalition will oppose moves by Labor to grant secular ethics classes the same tax-deductible status as providers of religious scripture classes, but claims it is not doing so out of any religious or philosophical objection to the classes.
Currently groups that provide special religious education classes in Australian schools can collect tax-deductible donations in order to fund the recruitment of volunteers or administration of their programs, while ethics classes cannot.
Primary Ethics, the sole provider of ethics classes in NSW, said its program would become financially unviable unless it was granted deductible gift recipient (DGR) status earlier this year.
The Gillard government had originally rejected Primary Ethics’ request for DGR status, but reversed that decision in April, signalling it would create an entire new category for ethics classes.
The change is expected to be put to the parliament on Tuesday evening or Wednesday.
Opposition assistant treasury spokesman Mathias Cormann confirmed the Coalition would not support the move.
He said the Coalition had no philosophical objection to ethics classes, but did not think it was appropriate that a whole new DGR category be created.
‘‘We are not comfortable to go along with the creation of a whole new category of deductible gift recipients – when there is only one eligible organisation at present – without proper consideration of all the implications of that change,’’ he said.
Assistant Treasurer David Bradbury said the government had sought to create the new category because it wanted to support the provision of secular ethics classes in government schools, and said forcing any individual organisations to make separate applications was not the right approach.
‘‘Expanding the DGR categories administered by the Commissioner of Taxation to providers of ethics classes is a better, simpler and more principled way of providing DGR status to organisations such as Primary Ethics,’’ he said.
Mr Bradbury said the Coalition’s move contradicted its claims to be a party that supports choice.
‘‘It is clear that they are opposed to more choice for children and parents who want the option of having ethics classes as an alternative to religious education classes in government schools,’’ he said.
Primary Ethics has been contacted for comment.

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CRACKDOWN ON TAX COULD STOP FIRMS’ GROWTH

Shaun Drummond, The Australian Financial Review, 28 May 2013

A crackdown on foreign companies exploiting tax loopholes will make it a lot harder for Australian businesses to grow overseas, says one of Australia’s most successful international companies, Computershare.
“Proposed changes in the budget where things that are packaged as attacking foreign companies that are not paying their fair share of tax will actually hurt Australian companies like Computershare quite significantly,” Computershare chief executive Stuart Crosby said told The Australian Financial Review.”
We have grown overseas by borrowing money in Australia to buy assets overseas and the changes attack quite significantly our capacity to get tax deductions for the borrowings we make to do that. ”
In the May budget the federal government said it would tighten the thin capitalisation rules which limit the amount of deductible debt a multinational firm or Australian firm with foreign interests can have. Instead of an allowance of $3 of tax deductible debt for every $1 of equity, from July 1, 2014 firms are limited to $2.
The government also stripped the tax-free status of some foreign dividends, if they have a debt-like nature such as redeemable preference shares, and removed a corresponding deduction for interest paid on debt used to buy the underlying shares.
Mr Crosby will explain his concerns on Australian and overseas tax changes, as well as competition and employment law, at the Group of 100 congress in Sydney on Tuesday.
The president of the G100, ¬Wesfarmers finance director Terry Bowen, said Australia’s business ¬regulations are “overly complex and burdensome” and could be a barrier to foreign¬ investment.
“If I asked our [chief financial officer] members to analyse Australia as a ¬company, they would say its strategic operations and balance sheet were relatively strong but it would need to quickly improve productivity to achieve its plans and maintain its fiscal strength,” he said.
The G100 wants an advisory board to the tax office that includes business representatives who will ensure the “administrative burden” of rule changes are considered. This would bring a “commercial perspective” to proposed legislation as well as the costs of tax-related decisions, or rulings.
“It would be focused on the administration burden, rather than deciding whether the corporate tax rate will be 30 or 29  per cent ,” Mr Bowen said.
One example where the administrative and cash flow burden will be high on business, he said, is the new requirement to lodge monthly tax payments .
Tax System Advisory Board on the way
A Tax System Advisory Board was an election commitment by the present federal government, and consultation opened in August 2010.
A spokesman for assistant treasurer David Bradbury said the government will make an announcement in the “near future” on a new board. It is ¬consulting on the implementation of corporate tax changes proposed in the budget.
“The government has announced that it will stop multinational corporations from exploiting loopholes in the tax laws that allow them to shift profits by artificially loading their Australian operations with debt,” he said.
Tax law has allowed foreign companies to reduce tax by lending to their Australian subsidiaries to fund acquisitions overseas, and claim a tax deduction in Australia, sometimes with no commercial reason for the structure.
Ninety-five per cent of companies already operate below the revised thin capitalisation cap of 60 per cent.
Just as they can now, companies will also be able to go above the new 60 per cent cap by applying to the tax office as long as there are good commercial ¬reasons to do so.

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COMPANIES AND TAX
COOK LIGHTLY GRILLED

The Economist, 25 May 2013

The testimony on Capitol Hill by Apple’s boss made the case for corporate tax reform in more ways than one
APPLE pays “all the taxes we owe—every single dollar,” its boss, Tim Cook, told the Senate permanent subcommittee on investigations on May 21st. The previous day the subcommittee had issued a report claiming that Apple’s extensive use of tax havens and shell companies had helped it avoid paying tax to Uncle Sam on $44 billion of profits between 2009 and 2012.
Apple has a two-pronged tax avoidance strategy, says Carl Levin, the chairman of the subcommittee. First, it “executes a shift of the profit-generating power of its intellectual property to an offshore tax haven”. Second, it “uses a number of tactics to ensure that, once this income is offshore, it remains shielded from US taxes”.
Among the tactics identified by the report was the creation of a subsidiary, Apple Operations International, based in Cork, Ireland, which in turn is parent to the group’s international sales arm. Between 2009 and 2012 the Irish offshoot recorded profits of $30 billion, courtesy of its having sucked in vast sums from other subsidiaries. Yet it has not filed a tax return anywhere for the past five years.
The company is incorporated in Ireland but in effect is managed from America (where its board meetings are held). This lets it claim it is a resident of nowhere for tax purposes, thanks to a difference between Irish and American rules: America bases residency on where a firm is incorporated; Ireland on where it is managed or otherwise controlled. Mr Levin called this the “Holy Grail” of tax avoidance: stateless profits, beyond the reach of all taxmen.
Apple, which points out that it paid $6 billion in American tax in 2012 (a year in which its global pre-tax profit was $56 billion) is not alone in attracting the attention of Mr Levin and his colleagues. An earlier subcommittee hearing took to task Microsoft and Hewlett-Packard over their tax avoidance. Overall, such techniques have helped American companies to amass an estimated $1.9 trillion offshore, safe from the American taxman.
Assiduous tax avoidance has driven down the share of corporate tax to around 9% of federal government revenues, says Mr Levin, noting that the average American public company pays an effective rate of 15%, less than half the statutory rate of 35%. “A recent study found that 30 of the largest US multinationals, with more than $160 billion in profits, paid nothing in federal income taxes over a recent three year period,” the senator noted.
It is not just American politicians who are indignant. The latest company to get a roasting from a British parliamentary committee was Google. On May 16th it was branded “devious” and “unethical”, and accused of misleading earlier hearings. This follows grillings of Starbucks, Amazon and the big four accounting firms (the high priests of the tax-avoidance industry).
British bosses echo their American counterparts in insisting their behaviour is not indecent, merely the consequence of flawed rules that need to be fixed. On May 20th Sir Roger Carr, president of the Confederation of British Industry, said tax avoidance should not be viewed as a matter of morality: “There are no absolutes.” The public takes a different view: in December, Starbucks decided to pay £20m ($32m) in tax to the British government that strictly it did not owe, to head off a consumer boycott that was hurting sales.
At this week’s hearing in Washington, DC, Mr Cook pointed to Apple’s own tax planning in support of his call for reform of the corporate tax regime in America, which he claimed disadvantages its companies against foreign rivals. RATE and LIFT, two groups of the country’s biggest companies, are lobbying Congress to pass a series of tax reforms including lowering the marginal rate of corporate tax, broadening the tax base against which it is levied by scrapping loopholes and moving to a “territorial” system which links the tax bill more closely to the sales (and perhaps also the number of employees) a firm has in any given country.
A territorial system alone would not stop the use of tax planning to game the system: after all, Britain and many other countries run their tax systems on such lines, and still lose lots of revenue to clever tax schemes. But there is already strong bipartisan support in Congress for some sort of tax reform. And, according to Edward Kleinbard, a business-tax expert, the recent revelations about Apple have encouraged supporters of reform to start discussing a minimum corporate tax rate of, say, 15% on foreign income. In this case, if the Internal Revenue Service found that a company were paying a rate of less than 15% on its profits in any other country, it could demand the shortfall.
Yet the failings of global corporate taxation will not be remedied by one country acting alone, even America (and there is no guarantee that the bipartisan consensus will translate into a sensible new tax law soon). Doing something about tax havens and loopholes is rising rapidly up the global agenda. David Cameron, Britain’s prime minister, says it will be a priority for the meeting of the G8 countries he will host in June. In July the OECD, a group of rich countries, is due to present a plan for global tax reform to the G20, which includes developing countries.
But for all the political rhetoric and populist appeal of taxing multinationals more, there are strong vested interests behind today’s flawed system. Chief among them are the governments of places that benefit from acting as tax havens, which are not just small tropical islands but include Luxembourg, Ireland (which gains jobs from hosting some of Apple’s subsidiaries) and Britain, which has a tradition of being relatively lenient on firms that break, as well as bend, the tax rules. So it will be no surprise if any reforms that emerge from the current political fury will do no more than tinker. If so, for all their public enthusiasm for tax reform, it is hard to imagine Mr Cook and his peers at Starbucks, Google, Amazon and the rest being terribly upset.

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BUDGET 2013 – LUNGE AND RIPOSTE

Tristan Ewins, Online Opinion, 24 May 2013

The 2013 Federal Budget was neither what it could have been, nor what it should have been. Labor faced an unenviable task with a $60 billion revenue shortfall over four years- linked with the high dollar, declining terms of trade – and wavering business profits as a consequence. This impacted on Company Tax receipts especially. Reduced revenues from the mining and carbon taxes didn’t help either; though Labor was too timid or too pragmatic to restructure and revivify either.
Labor had options to bypass austerity while actually better containing the deficit. But they chose not to go down that path for fear of ‘getting on the wrong side’ of relatively narrow vested interests. Yet Labor did decide tolimit austerity. Cuts have not been so severe as to lead to a European style scenario of negative growth and mass unemployment.
Higher Education cuts are in the vicinity of $2.3 billion. Having locked itself in to a policy of small government and low taxes the Government decided to reprioritise rather than provide new money for crucial programs. The result was the sacrifice of university scholarships valued at $2000 – which were transformed into ‘loans’, as well as the rescission of options to repay HECS (Higher Education Contribution Scheme) upfront at a 10 per cent discount. The latter will mainly affect reasonably secure families – as for the disadvantaged upfront payment could be unmanageable in any case. But the $900 million ‘efficiency dividend’ could put pressure on the wages of academics and other education professionals, while perhaps resulting in more course closures.
Not just middle class welfare, but middle income welfare is set to go. This is classic Labor policy–at least since the Hawke years: making do with less through extensive and narrow targeting of welfare. But some of the cuts are regressive. Low income groups who would have benefited from carbon tax compensation will also find that some of that compensation– in the form of tax cuts – has been withdrawn.
So Labor has not quarantined ‘middle income Australia’ from its cuts. But for some middle income is not the same as middle class. Surely further reforms aimed at recouping revenue from the top 10% income demographic would have been fairer – even though the reality is that we need a broad enough tax base to bring in the necessary revenue to maintain health, education, welfare, infrastructure etc.
Notably the policy of mandatory detention of asylum seekers – supported by both the major parties – has itself resulted in a blowout of over $3 billion. But so long as Abbott plays the fear card on refugees Labor can be expected to emulate Coalition policy in order to neutralise or minimise any political benefit.
The amount of money those deemed unemployed can earn via casual labour before their benefits are effected has risen by about $20 a week. But the initiative does not go far enough; and not. A $50/week increase in Newstart remains urgent to lift the unemployed out of dire poverty
There have also been boosts for cancer research and treatment. And a scheme to assist seniors to ‘downsize’ their home – moving into more “manageable’ residences – is very welcome. But further progressive action could involve the removal of taxes such as stamp duty from low-income Australians also wanting to move in to cheaper accommodation. Stamp duty is a state tax; but the states could be encouraged to implement such a policy in return for compensation from the Commonwealth.
Labor is promising public money for transport infrastructure – but probably much of this will be in the form of Public Private Partnerships. It is likely, therefore, that some new projects will take the form of toll roads and the like. This would have a regressive distributive effect.

And importantly – Labor is recouping $4.2 billion over four years by closing business tax loopholes – certainly a more welcome initiative than further austerity.
But Labor’s big policies remain disability insurance and the so-called Gonski reforms.
When fully implemented by 2019-20 disability insurance will have a price-tag of about $22 billion – covering over 450,000 disabled Australians and their carers. Therefore there will be a 0.5% increase in the Medicare Levy. ( ‘The Age’ (May 15th 2013) Though more robust action is necessary on the tax reform front to fund the program over the long term.
Combined with the education reforms, though, it is doubtful that the states can afford this without further federal grants – or further state-level ‘reforms’. (again: user pays infrastructure, or increased state taxes) Even the Liberal states had been arguing for federal tax reform in order to consolidate their fiscal position. (though of course they were Ideologically driven to demand a regressive increase in the scope and coverage of the GST, rather than fair reforms elsewhere in the tax mix)
The Gonski reforms have also been dramatically watered down – though they remain substantial. Combined with state funding the Commonwealth expects funding of $14.9 billion over six years – compared with the initial vision to expand education funding by more than twice that amount.
The Abbott response
In response to the Labor Budget Abbott talked of a “Budget Crisis’ created by ‘Labor mismanagement.’ This might go down well with some people who don’t want to scratch far beneath the surface. But the reality is that the high dollar has driven the Budget’s deteriorating position. Abbott has shared the government’s position of not intervening to lower the dollar in order to mitigate poor terms of trade, and the disaster for manufacturing. Arguably intervention is warranted in exceptional circumstances. And furthermore, Abbott’s opposition to a more robust mining tax deprived the government of the funds that may have been employed to effectively subsidise affected industries in manufacturing and tourism especially – keeping them viable until the end of the mining boom, and a drop in the dollar. This was important to prevent skills and capacities being lost over the long term.
Abbott and the Conservatives have also been complaining about Labor’s ‘out of control spending’. They are talking about a ‘simpler’ tax system – which almost certainly translates into more regressive flat taxes (eg: an expanded GST) which redistribute wealth from the real ‘battlers’ to the affluent. For Abbott this kind of ‘tea bagger Ideology’ is a betrayal of his Democratic Labor Party past. While the DLP was not a friend of Labor, they were not neo-liberals and believed in social welfare. But Abbott will say and do anything to get the ‘top job’. The Americanisation of Australian politics is a real threat: and the Liberal neo-conservatives seem to see the US ‘ideal’ of harsh social stratification as something to aspire to and emulate.
Also, Abbott’s rhetoric proves to be hollow when subjected to scrutiny. As Tim Colebatch points out (The Age, May 15th 2013) “Revenue this year is forecast to be 23 per cent of GDP, compared with the Howard Government’s post-GST average of25.4 per cent. And spending levels are pretty much identical. And amazingly – in Melbourne’s ‘Herald Sun’ Jessica Irvine was allowed to make the observation that Labor “inherited a structurally flabby Budget from the Howard Government, with too many cash handouts and unsustainable tax cuts.” And: “The Budget would be in surplus today if personal income tax rates had not been cut [under the Howard Government) eight years in a row.” (Herald-Sun, May 15th, 2013)
Why is Costello’s record therefore not examined more rigorously? On the Howard/Costello watch the housing bubble rendered home ownership an impossible dream for many. The privatisation of Telstra left subsequent Labor governments in a position of having to ‘pick up the pieces’ and pay a high price for access to Telstra infrastructure for the NBN. The benefits of the mining boom were squandered with unnecessary middle class welfare and unsustainable tax cuts.
Abbott has also attempted to rationalise his Parental Leave for the wealthy scheme by comparing it to annual leave. But while many Australians only get 2 weeks annual leave, Abbott’s scheme will provide SIX MONTHS leave on FULL PAY for professionals earning $150,000/year. The ultimate effect is a redistribution from ‘battlers’ to the wealthy – as Abbott’s largesse with Parental Leave will be mirrored by austerity elsewhere.
Other projected Abbott policies include more punitive welfare in the form of Work for the Dole, and the removal of the (threadbare) Newstart ‘safety net’ entirely for under 30s. A layer of desperately unemployed – a ‘reserve army of labour’ – will undermine workers’ organisation and bargaining power.
We can also expect an inferior version of the National Broadband Network; as well as assaults on the rights of labour including organisational rights; cuts to welfare; and the rescission of superannuation co-contributions for low income workers.
Lessons for Labor
There are several areas in which Labor could have further minimised the deficit, preventing austerity and actually expanding the social wage.
Rigorous mining tax reform could have brought in $6 billion. Reversion to 75% Dividend Imputation could have recouped perhaps another $6 billion – or perhaps $12 billion if reverting to 50% as once advocated by renowned Australian economist John Quiggin. Restructuring income tax should also be an option; as should a tax on inheritances over $2 million. And cutting superannuation concessions for the wealthy and the upper middle class could have captured between $10 billion and $20 billion. Talk of ‘taking pressure off public pensions’, here, is a furphy – as superannuation concessions alone are now costing more than the entire Aged Pension Budget.
Arguably Labor’s timidity was unnecessary. The government is withdrawing some payments from low to middle income groups – but shies away from raising further revenue from the top 5% to 10% income and wealth demographics. Why back away from such reforms when they would target only a wealthy minority; and when they would provide the scope for massive expansion of Australia’s social wage and infrastructure – the benefits of which should be plain to voters?
Also importantly – Labor could have mimicked Abbott on one crucial point: his 1.5% levy on big business. Abbott could hardly have complained given his own policy, and Labor could have directed the money into areas of much more acute human need – for instance, aged care. It is still not too lateto develop just such a policy and seek a mandate for it at the coming election.
With perhaps over $30 billion from such initiatives a surplus may even have been achieved for the coming year. Though that would be apolitical objective; as the precariousness of the world economy demands a more fiscally expansionist stance. But Gonski could have been implemented in full. And comprehensive Aged Care insurance could have been rolled out on similar principles to Disability Care Australia. Finally, resources could have been provided for the States – maintaining equity in provision of health services; providing further resources for public transport and other infrastructure without regressive user pays mechanisms or even privatisation of roads – where consumers pay the price.
It is not too late for Labor to emphasise social insurance as a central theme for the election. If Abbott could be pressed to accept disability social insurance, the right kind of articulatory strategies by Labor could drive him to accept Aged Care insurance as well. If Labor loses the election –but manages to dictate the policy agenda in such a manner – then even in electoral defeat it would comprise a kind of victory. The suffering of our aged citizens – especially those in high dependency care – is an obscenity to the extent it could be ameliorated – but is not – because of ‘other priorities’.
There is relief that Labor “has not cut to the bone”. But the Budget is not all that is could have been, nor what it should have been. Failing to extensively reform superannuation concessions was the key capitulation in the face of relatively narrow vested interests. Hopefully, though, Labor will now press the themes of tax reform , social insurance and social wage expansion in the following months, and seek a mandate for progressive change.

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AUSTRALIA’S CHOICE: KEEP HIKING TAXES, OR GRAPPLE WITH OUR SPENDING ON HEALTH AND THE AGED

Mark Crosby, The Conversation, 17 May 2013

More than a decade ago the federal treasury produced the first Intergenerational Report (IGR), warning of the challenges facing the Australian economy due to demographic change.
The IGR warned that the living standards of future generations would depend on the decisions made at that time. Unfortunately budgetary decisions made in the past decade have not begun to meet the challenges of an ageing population, and in most cases have taken us backwards.
We are not, on the current trajectory, headed for a smart, productive workforce enjoying high living standards. Instead we are headed toward the European style long-term malaise, though I would hope that we do not fall so far.
The challenges outlined in the IGR and subsequent updates are pretty simple. With an ageing population, the burden of higher aged care and health costs will be borne by a smaller workforce.
While demographic forecasts are subject to errors, the general trend will be impossible to reverse. The first IGR projected that the ratio of adults not in employment to those in employment would rise from approximately 0.7 to 0.9 by 2042, and continue to rise thereafter.
What can be done about this problem? One option is the status quo. Assuming that GDP continues to grow, a rising welfare and health burden can be dealt with through increasing tax revenues and government expenditure, with living standards still continuing to rise.
In my view this option will see living standards decline dramatically in the coming decades relative to where they ought to be and to our regional peers, so that the opportunities for our children will be far less extensive than they should be. Rising tax burdens stifle innovation and entrepreneurship, and our new competitors in Asia will increasingly occupy spaces that Australians should also enjoy.
Let me first spell out the general directions taken in the past ten budgets, then spell out some different options and directions to be considered.
In the 2003-04 financial year a small budget surplus was projected, with spending of around $177 billion. Social security and welfare accounted for $76 billion (or 42%) of total spending, with health comprising a further A$31 billion (18%) of total spending. Defence, and education spending were each around A$13 billion, or 7% of the budget. If one looks at the budget aggregates it is very clear that in order to limit spending increases, rising health care and social welfare payments are the major issue, with an ageing population leading to increasing pressures in these areas.
If one looks into the details of the social welfare payments, aged care payments are the largest single spending item in the budget. In 2003-04 A$26 billion were payments to the aged, while families with children received A$21 billion. While health spending is not broken down by spending on the health of the aged, the Productivity Commission has reported total health costs of those aged over 75 are more than four times the costs of those aged 35-54.
The 2013-14 budget reports accrual expenses of A$398 billion, and revenue of A$388 billion. Over the past ten years that is an average rise in tax revenue and expenditure of around 15% per year. During the same period nominal GDP grew by 8.5%.
Some of the increase in expenditure and tax revenue is due to different treatment in the budget of GST revenues and associated transfers, but even after taking this out of the budget, spending rises by more than 12% per year, much faster than nominal GDP.
Treasurer Wayne Swan has blamed some of the current deficit on slower than expected nominal GDP growth – one could alternately argue that Australian governments have become far to used to relatively high nominal and real GDP growth, and in particular company tax revenues, and have spent the windfall before they earned it.
Social security and welfare spending accounted for A$138 billion in the latest budget, a rise of nearly 14% per year over the past decade. Assistance to the aged has risen to almost A$55 billion, a rise of 22% per year since 2003-04. Over this same period health care spending has risen to A$65 billion, an increase per year only slightly slower than spending on assistance to the aged.
Despite the warnings in the IGR, we have not gotten close to controlling the two main costs associated with an ageing population. This is perhaps not surprising in a world where the aged vote, our voters are getting older, and our politicians pander relentlessly to the median voter, but this mix is a recipe for an impoverished Australia.
What can be done to control these costs? In regard to both health and aged care spending, government spending must be provided only to those who are in need of assistance. Pension tests are still far too lenient, with many pensioners who receive some assistance clearly capable of caring for themselves.
Anyone who receives any pension also receives very substantial health benefits and other subsidies. Over the past decade the governments share of total health spending has risen. Private contributions to health need to be increasing, not decreasing, in the future.
A further factor is the lack of savings of older Australians. The government is to be commended for increasing the compulsory superannuation contributions over time. However, the government should resist changes to superannuation that make it less attractive, and also ensure that withdrawals from superannuation are managed so that balances are sufficient to the end of what will be very long lives for most people.
Further, it is well to remember that when the government pension was introduced, the average life expectancy for men was still below the pension age of 65. While increases in the pension age to 67 are a good start, the current reality is that the right pension age is probably closer to 75, or even 80, and ought to be increased well above 67.
In this Asian century it is interesting to look at some developments in our Asian neighbours. In most countries in Asia spending on health, on pensions, and on education is a fraction of our spending. Of course it is often the case that we do not want to emulate our neighbours, however there are many cases where we have a lot to learn.
At Narayana Hospital in Bangalore, heart surgery is performed at a fraction of the cost of the same procedure in an Australian or US hospital, with outcomes at least as good in terms of mortality and other indicators. The focus at this hospital is on high scale, efficiency, and low cost. In OECD economies it is this last point that is usually lost.
In education the government has the ambition for our education system to produce students who are top five in the world. Currently Shanghai has the top ranked students in maths and science outcomes according to the OECDs PISA tests. There are some things we would not want to replicate from the Shanghai system, such as the high levels of homework and discipline, but Shanghai has also implemented many effective reforms that have improved weaker performing schools – mentoring, training of teachers, and experimentation with different teaching methods have been very successful. Interestingly, the approach in Shanghai is very decentralised and experimental, which seems to be the opposite direction to the one Australia is taking.
It is telling that we still compare our economy with the mostly weak OECD economies in our budget papers, rather than the more dynamic and diverse economies in our region. In the Asian century we have a lot more to learn from our Asian neighbours than from OECD economies. German Chancellor Angela Merkel was recently quoted in the Financial Times as saying that Europe has 7% of the global population, 25% of global GDP, and 50% of global welfare spending. Welfare spending is far from the only problem in Europe, but the habits of dependence, rather than work, are a major issue.
Fifty years ago Donald Horne referred to Australia as the lucky country. But he also pointed to the fact that we were run by second rate people who shared its luck. Unfortunately luck will not be enough to get us through the next 50 years.
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EASY SOLUTION FOR A LAND OF RISING SUMS

Peter Martin, The Sydney Morning Herald, 26 May 2013

If you believe that, I bet you also believed in the tooth fairy, in the Australian government when it said it would only use the tax file number for tax, in Julia Gillard when she said she wouldn’t increase the Medicare levy and in John Howard when he said he wouldn’t introduce a GST in the first place. Things change. The GST hasn’t, yet. But it was designed to.
Think about the agony that went into building it. More than a million Australian businesses were forced to become tax collectors. They are made to complete business activity statements, to install special computer codes on their cash registers and to hang on to money destined for the Tax Office they would rather spend. A University of NSW study finds it the most expensive of the taxes for businesses to collect, costing each business an average of $12,000 a year.
But now that it is in place, the extra cost of raising it is next to nothing. All that’s needed is a small change to the line of computer code in each cash register. The real work has already been done.
Imagine a building constructed with super strong supports in the expectation that one day an extra storey will be placed on top. The building is ready and one day the extra storey most probably will be placed on top because it’s a very cheap way of getting extra space.
The Treasury has ranked Australia’s 12 most important taxes in terms of the trouble that would be caused by increasing each one a little more. The most trouble are mining royalties, insurance taxes, payroll taxes and company tax. About the easiest, right at the cheap end, is the GST. It is already in place and by international standards it is low.
New Zealand lifted its GST from 10 per cent to 12.5 per cent and then to 15 per cent. Introducing it was difficult. Lifting it was easy. Britain began with 10 per cent and now has 20 per cent. Germany has 19 per cent, France 19.6 per cent. China has 17 per cent.
Taxes are always at their most unpopular before they are introduced. Remember the fringe benefits tax, the capital gains tax, the carbon tax? Each was talked about in apocalyptic terms before it was introduced. Afterwards, each is, if not popular, certainly little remarked upon.
Labor’s Kim Beazley looked silly when he continued to promise to roll back the goods and services tax. Tony Abbott looks just as silly continuing to pledge to roll back the carbon tax. Experts have a saying: ”An old tax is a good tax.” That’s why our GST will inevitably be lifted. It is old, it is relatively low, and we will need more.
And it does little damage. Boosting income tax at the present rates would discourage people from working, especially mothers already facing big costs returning to work.
Boosting company tax would frighten away some of the foreign investment we will need as the mining boom winds down. But boosting our present rate of goods and services tax would do little to dent spending. That’s what the overseas experience suggests.
It would unfairly disadvantage low-income Australians. They spend almost all of their incomes on goods and services. High-income Australians escape some of the tax by spending overseas and saving for retirement. But compensating low earners isn’t difficult. We did it most recently with the carbon tax.
The GST takes in $50 billion a year. Boosting it to 12.5 per cent would take in an extra $12.5 billion (less after compensation). Boosting it to 15 per cent would take in an extra $25 billion. It is money we will need. Health and aged care costs are set to more than double as a proportion of gross domestic product over the next four decades. No one seriously suggests not paying those costs.
And we are rich enough. The question is, what is the least-damaging way of raising more tax? At times Tony Abbott and Joe Hockey have put forward another (apparently less painful) solution – cutting government waste. But it is not clear there is enough waste to cut. The budget papers show the government spends no more of Australia’s national income than it did 10 years ago.
Treasury boss Martin Parkinson put it starkly this week. He said we would need to either pay more tax to government or expect less from the government. The GST is about the best means of paying more.

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ISLAND ALLURE: THE TAX SECRETS OF BIG BUSINESS

Georgia Wilkins and Ben Butler, The Sydney Morning Herald, 25 May 2013

Very few Australians will have heard of Burdekin Investments, one of the thousands of low-profile post-box companies that makes its home at Ugland House, a resort-style office building in George Town, the capital of Caribbean tax haven the Cayman Islands.
It keeps a much lower profile than its parent, Australia’s biggest company, Commonwealth Bank, whose logo is proudly borne by the group’s branches on shopping strips across the country.
But thanks to tax authorities and governments desperate to plug budget gaps, tax-haven companies such as Burdekin are getting more attention. There have already been investigations into the tax paid by technology multinationals in Britain and Australia, and this week the US followed suit, with the powerful Senate permanent subcommittee on investigations inquiring into the tax affairs of Apple.
As the details of Apple’s complex tax minimisation strategies emerge, questions are being raised about the legitimacy of Australia’s own company ownership structures and their heavy use of tax havens.
BusinessDay can reveal that all but one of Australia’s top 20 companies listed on the stock exchange have subsidiaries in low-tax or tax-free jurisdictions, including Hong Kong and Singapore.
At least half have subsidiaries in tax havens such as Bermuda, Switzerland, Jersey and the British Virgin Islands. This includes Commonwealth Bank’s Cayman Islands subsidiary. Telstra, which says it paid $1.8 billion in federal, state and local taxes last year, controls 20 subsidiaries across five remote island nations, including Jersey and Mauritius.
The Uniting Church’s justice and international mission unit is preparing to release a report into the ownership structures of top 100 companies on the ASX.
The report, titled Secrecy Jurisdictions, the ASX 100 and Public Transparency, reveals that as of April 2011, 61 of the top 100 companies held subsidiaries in ”secrecy jurisdictions” that have been targeted by tax authorities for their lax standards.
While many of Australia’s large companies do legitimate business in low-tax jurisdictions such as Hong Kong and Singapore, which often act as an entry point into China, financial documents show many subsidiaries exist with little evidence of commercial activity.
Dr Mark Zirnsak, director of the justice unit and author of the report, says he is concerned about the role secrecy jurisdictions play in the global economy and how connected they are to Australian business. ”These are places that fail to meet international standards on transparency, on anti-money laundering laws, and on tax law co-operation,” he says.
The report comes at a crucial time for the federal government, which is struggling to fund essential services without making cuts.
”If the government has less revenue, as we’ve seen at the latest budget, then tough decisions need to be made about what money is spent where,” Zirnsak says.
”Does money go into health? Does it go to people with disabilities? Is there enough money to help people with mental health problems? We end up trimming money that goes to helping people in developing nations overseas to fund disability services.”
CBA says it is looking to close Burdekin Investments, which is incorporated in the Cayman Islands but deemed a British company for tax purposes. Westpac has confirmed it held subsidiaries in Luxembourg and Jersey, in the Channel Islands.
A Westpac representative says the Jersey entity, Mayfair Australia Investments, was closed last year and it is preparing to wind down the Luxembourg subsidiary, Codrington Sarl, believed to be used to finance the bank’s British operations.
According to recent annual reports, Telstra alone controls 20 subsidiaries registered in tax havens – 10 in the British Virgin Islands, four in Bermuda, four in Jersey, one in Mauritius and one in the Cayman Islands.
But the company defends the long list, with a spokesman saying: ”Some of the subsidiaries are operating entities, others are companies holding investments in other companies, some are dormant and some are being liquidated.
”We pride ourselves on operating to the highest standards of corporate governance and on creating significant social value, through employment, investment and business activities.”
The heavy use of offshore units by banks, particularly Macquarie Bank, to minimise tax, has led the federal government to clamp down in the budget on the practice.
This month, as it sought to minimise its deficit, it announced measures to save $4 billion by closing down ”loopholes and abuses” in tax laws that Assistant Treasurer David Bradbury says are being abused.
The measures include tighter thin-capitalisation laws, which govern how much debt an offshore parent company can load into an Australian subsidiary; a crackdown on ”dividend washing”, which allows investors to earn two sets of franking credits on the same shares; and an increase in Tax Office compliance checks on offshore marketing hubs.
The measures follow the government’s earlier moves to amend transfer pricing and tax avoidance laws in legislation now before Parliament.
Bradbury warns that Australia’s corporate tax base is under threat from aggressive tax planning by multinational companies.
”If we see gaping holes in our laws, then we need to do our best to legislate to close them,” he says. ”Some of the measures that we proposed do crack down on loopholes. Some of the practices that we’re targeting with measures introduced in the budget – they are straight out rorts.”
The elaborate tax-minimising strategies of Apple and Google, which have come under focus because of their sheer scale, have confounded Western governments grappling with the fallout of the European debt crisis and soaring unemployment.
They have also drawn attention to the ”double Irish-Dutch sandwich”, a strategy that Apple, Google and many other big multinationals use aggressively to bolster profits.
A Treasury paper said last month there was ”serious concern” that Australia’s tax system was failing in the digital age, as companies, particularly those dealing with intangible products such as online advertising, took advantage of low-tax jurisdictions.
This week’s US Senate inquiry into Apple’s use of tax havens revealed products sold in Australia were handled by several offshore subsidiaries to prop up Apple’s offshore profits.
The revelation was one of many contained in congressional documents that outlined how Apple used a global network of subsidiaries, including in Ireland and Singapore, to avoid paying higher taxes elsewhere.
Documents filed by US congressional investigators show Apple products manufactured in China are resold to Apple retailers in Australia after an Irish subsidiary, Apple Sales International, takes ”paper” ownership of the products mid-transit.
The process, which allows Apple to dodge foreign sales tax rules and to concentrate profits from the sales revenue in the tax havens, has come in for scathing attacks from the British, European and US governments.
Jason Sharman, a professor in international political economy at Griffith University, warns it is not just technology companies that implement these strategies.
”If you are a big Australian mining firm, based in 15 countries, you may want to book all the loans and leasing agreements out of a low-tax jurisdiction,” he says.
”Even if you are BHP, it’s not as if most people employed at the firm are swinging a pick or driving a truck. Most of them are doing intellectual, white-collar work.”
Many holding companies used by the ASX top 100 are likely to be used for holding intangible things such as patents, intellectual property, treasury operations or financing loans, Sharman says.
”Any physical firm is still going to involve a lot of intangibles.”
This week’s grilling of Apple by US legislators followed an EU summit in Brussels that called for effective measures against tax avoidance and fraud, listing 10 steps to be in place by December. The EU estimates tax evasion and avoidance costs it €1 trillion ($1.33 trillion) a year.
And the OECD will present a draft action plan on tax-base erosion and profit shifting to the G20 finance ministers meeting in July.
Bradbury says the issue needs to be tackled at a domestic, multilateral and global level. ”I think as governments come under pressure to consolidate their finances, to reduce spending and to shore up their tax basis, this is an obvious area of focus because it is clearly an area where some multinationals are not paying their fair share of tax.”
It’s not just a question of the law, Bradbury says. ”There’s a broader question about the morality of these practices. Many companies have said ‘if you think this is wrong, change the laws and deal with it’.”
Corporate Tax Association executive director Frank Drenth says large companies will always pursue ways in which to boost their profits through favourable tax treaties.
”It is true that different multinational groups will go harder than others in exploiting tax planning opportunities, because there are differences between the tax systems in different countries.”
He warns that compulsory disclosure of company taxes would result in a witch-hunt, and says tax subsidiaries in low-tax jurisdictions are often legitimate.
”Australian companies will use these locations but they’re generally for sound business reasons,” he says. ”Some companies may decide to clean up their act sooner rather than later, but mainly because it’s not a good look.”
Bradbury admits that global tax laws have not kept up with the digital age, and are in dire need of reform. ”The basic problem here is that the rules of international taxation were developed for the industrial age,” he says. ”They are failing abysmally in keeping up with the changes of the information or knowledge economy.
”If we let these practices go on unchecked, we are allowing some businesses to gain an unfair edge over their competitors. Because if you’re a small business that’s only located in one jurisdiction, you don’t have the capacity to transfer profits and shift profits offshore, and you certainly don’t have the capacity to engage the best legal and taxation minds in the country to minimise your tax.
”There’s also the question that if some of the most profitable multinational companies are not paying their fair share, that is going to mean that other taxpayers, not just other businesses, but individuals – households, mums and dads, pensioners – are going to have to carry the can.”
A fundamental principle of tax law is that the affairs of all taxpayers, from individuals to big companies, are confidential.
Sharman says that while a company’s headline tax rate is usually about 35 per cent, the effective tax rate is about 12 per cent or much lower. ”You have a lot of companies that are paying 3 per cent of tax or no tax at all, depending on how they structure these things,” he says.
”If you look at the gap between a company’s headline tax rate and what it actually pays, it’s pretty substantial.”
A network of non-profit organisations is pushing governments to act not only to shore up their own tax bases, but also those of developing nations. Corporate tax evasion costs poor countries $US160 billion ($165 billion) a year, Christian Aid says. In Australia, Oxfam is urging resource companies in particular to pay a ”fair share” of tax in developing countries.
Too many resource companies shift profits out of developing countries into secrecy jurisdictions, says Oxfam mining advocacy co-ordinator Serena Lillywhite, who wants multinationals to ”actually pay their taxes in the country where the economic activity is taking place, or where the investments are located, rather than trying to shift their profits into low tax regimes”.

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TOP FIRMS’ TAX HAVEN LINKS REVEALED

Georgia Wilkins, The Sydney Morning Herald, 25 May 2013

Almost two-thirds of Australia’s top 100 companies listed on the stock exchange have subsidiaries in tax havens or low-tax jurisdictions, a new report shows.
Thirteen of the top 20 companies,  including two of the big four banks, have entities in well-known tax havens such as the Cayman Islands, Luxembourg, the British Virgin Islands and Bermuda.
A Uniting Church report, Secrecy Jurisdictions, the ASX100 and Public Transparency, reveals 61 of the top 100 companies held subsidiaries in ‘‘secrecy jurisdictions’’ as of April 2011 that have been targeted by tax authorities for sheltering companies dodging tax.
News Corporation, Westfield and the Goodman Group were  among the worst offenders, the group said, holding more than 50 entities in low-tax jurisdictions each.
The report shows that while many of the companies may do legitimate business in low-tax jurisdictions such as Hong Kong and Singapore, many subsidiaries exist with little evidence of commercial activity.
A subsidiary owned by the Commonwealth Bank called Burdekin Investments can be traced to Ugland House, a resort-style office building in George Town, the capital of Caribbean tax haven the Cayman Islands.
The building has become known for housing thousands of post-box companies that exist simply to take advantage of local tax rules. A spokesman for the bank said it was looking to close down the entity and would not explain what it did or whether it had any employees.
The report shows 10  ASX 100 corporations have subsidiaries in Jersey, making it one of the most popular locations for offshore entities among Australian companies, after Hong Kong and Singapore.
The Cayman Islands, Luxembourg, Switzerland and Ber- muda were also popular destinations, with many companies owning multiple entities in each.
“These are places that fail to meet international standards on transparency, on anti-money-laundering laws, and on tax law co-operation,’’ said Mark Zirnsak, the director of the church’s Justice and International Mission Unit and author of the report.
“Companies should be willing to be transparent and public about why these subsidiaries are in these locations given the concerns around inadequate regulation.’’
Mr Zirnsak  said the report came at a crucial time for the federal government, which was struggling to fund essential services without making cuts.
The report comes amid a global crackdown on the elaborate tax minimisation strategies of Apple and Google. This week, a US Senate inquiry exposed the elaborate corporate operating structure of Apple, which used subsidiaries in Ireland and Singapore to minimise its tax.
According to its 2012 annual report, Telstra controls 20 subsidiaries registered in well-known tax havens – 11 in the British Virgin Islands, four in Bermuda, four in Jersey, one in Mauritius and one in the Cayman Islands.
The company defended itscorporate structure, with a spokesman telling Fairfax Media: “Some of the subsidiaries are operating entities, others are companies holding investments in other companies, some are dormant and some are being liquidated.
”We pride ourselves on operating to the highest standards of corporate governance and on creating significant social value, through employment, investment and business activities.”
The report also shows News Corporation has more than 70 subsidiaries across the Cayman Islands, British Virgin Islands, Luxembourg and Mauritius. The company is registered in the US state of Delaware, which has attracted its own criticism for sheltering post-box companies taking advantage of the state’s soft tax rules.
Fairfax Media, owner of The Age, has two subsidiaries based in Singapore, and has closed a third that was based in Hong Kong.
The heavy use of offshore units by banks, particularly Macquarie, to minimise tax, has led the federal government to clamp down on the practice in the recent budget.
”If we see gaping holes in our laws then we need to do our best to legislate to close them,” Assistant Treasurer David Bradbury said this week.
Mr Zirnsak said the report was likely to be a ”significant underestimate” of the number of subsidiaries in secrecy jurisdictions.

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GREED, NOT POLICY, WILL DRIVE UP THE GST

Terry Sweetman, The Courier-Mail, 24 May 2013

TREASURER Wayne Swan has been accused of desperate scare tactics over claims the Opposition will fiddle with the goods and service tax if it wins government.
That seems only fair, given that back in 2007 the then desperate treasurer Peter Costello was doing his best to put the frighteners on the electorate by warning that Labor would ramp up the GST rate to 17.2 per cent.
Labor didn’t and Opposition Leader Tony Abbott says the Coalition won’t, so history will be the judge.
Costello’s scare story was very loosely based on the Withers-Twomey report commissioned by the Council for Australian Federation (a forum for state and territory leaders). Labor’s is based on the fact that Abbott won’t rule the GST out of the taxation white paper he has promised.
It may be an exaggeration to claim the fix is in, but the pieces are falling into place.
Given the avarice of government, the wonder is that the GST has remained unchanged for nearly 13 years.
The last Budget, rubbery as its premises might be, estimated GST revenue this financial year at $57.3 billion. Factor in an increase in the GST rate and we’re not talking chump change.
Politicians have cravenly avoided serious discussion of the GST (it was deemed off limits during the Henry review) but now it is very much on the agenda.
Labor, which could badly do with another pocket into which it could slip its hands, remains locked in by its own alarmist rhetoric when the GST was introduced.
And ruling the GST out of Abbott’s tax review would be like ruling oxygen out of an atmospheric analysis.
However, it is fatuous for him to pretend Canberra is little more than a casual eyewitness to this serial mugging of daily financial activity.
He has hand-balled it to the state governments and pledged there would be no change without an electoral mandate.
There are some games being played but asking hungry states to turn their backs on billions of dollars would be like taking a ravenous dog into a butcher’s shop and telling him to sit.
And the notion of an explicit GST mandate is pretty slippery in a landslide election scenario.
The politics of the GST remain as turgid as ever, but that shouldn’t stop us looking at the realities.
On this site this week, colleague Jessica Irvine gave her top 10 reasons to increase the GST and include food, health and education in its grasp.
Here are my top 10 reasons why we should at least think twice.
1. While the GST rate didn’t quite achieve “core promise” status in 2000, the assurances were such that a change would be seen as another betrayal of political trust.
2. A consumption tax unfairly impacts on the poor, pensioners and retirees, who cannot be adequately compensated through income tax changes. The bigger it is, the crueler it is.
3. The inclusion of food, health and education in the GST is a wicked prospect, punishing those who can least afford it. As Irvine wrote: “We’ve all gotta eat.”
4. Lifting the rate (with a possible income tax trade-off) would accelerate the process of moving Australia from an equitable progressive tax system to a regressive one, and widen the wealth gap.
5. Increasing the rate to bail out impecunious, incompetent or bankrupt governments is not an inducement to excellence and sets a dangerous precedent.
6. No new deal should be struck while there is so much unfinished business in the way of state taxes and a rapacious desire for more (think Queensland flood levy). Even Costello agrees.
7. There should be no further shifting of the burden until parties on both sides live up to their earlier bluster on cracking down on high-income earners exploiting trusts to minimise tax.
8. There is limited gain in lifting the GST rate if we can’t stem the the black economy it has spawned. The Australia Institute put the annual cost of cash-in-hand payments at a very conservative $5 billion (others say much more), not far short of the prospective take from an increased GST rate.
9. Some of the arguments for an increase in the GST are precisely the same as those used to justify a 10 per cent rate in the first place. Can we believe an increase would not lead to the sort of incremental rises that have taken the rates above 20 per cent in some respectable economies?
10. Moving the GST rate from 10 per cent to some other less rounded figure would make a mockery of the “simplicity” that was so much of the Unchain My Heart hard sell of the GST.

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TAXING PRESSURE FOR MORE DOLLARS

Ross Gittins, The Sydney Morning Herald, 22 May 2013

Someone said the reason the political debate in Australia has become so bitter and personally abusive is that, at bottom, there’s not a lot of difference between the two sides on policy issues. There are a few issues on which they offer clear alternatives, but not many.
You may think, for example, there’s a big difference between them on taxation. But, as it has become clearer in the past week, the supposed differences are more contrived than real.
The parties are as one in their refusal to acknowledge the truth that strikes whoever examines the many studies inquiring into future spending pressures on federal and state budgets: there’s only one way taxes can go and that’s up.
I’m sure all our political leaders understand this but, fearing what the other side would say, they pretend the problem isn’t looming. When I tax cabinet ministers with the topic, they don’t tell me I’m talking nonsense, they look aghast and mutter ”we couldn’t possibly say that”.
As so often with economic matters under the Rudd-Gillard government, in the politicians’ determination not to confront voters with the harsh realities on taxation it’s the Liberals who take the offensive and Labor that’s defensive.
Tony Abbott initially put a lot of work into exploiting and reinforcing the voters’ deeply held misperception that the Liberals are the party of low taxation, and Labor the party of high taxes. He promised to abolish Labor’s ”great big new taxes” on carbon emissions and the impoverished mining companies. Bronwyn Bishop repeated virtuously that the Liberals are always opposed to big new taxes.
I wanted to ask her, do the letters GST ring a bell? When you measure the burden of federal taxes as a proportion of the nation’s income – as you should – Peter Costello was our highest taxing treasurer. Wayne Swan can’t hold a candle to him. Only if you ignore inflation and the real growth in the economy can you pretend Swan is extracting more tax than his predecessor.
But when it comes to cynical and hypocritical exploitation of the public’s presumed opposition to higher taxes, both sides have form. Remember how hard Labor campaigned against John Howard’s iniquitous goods and services tax in 1998?
It was immoral and would greatly damage the economy. Yet when Labor returned to power nine years later, the idea of repealing or even modifying the tax never once crossed its mind.
Abbott’s grandstanding on the horrendous cost and economic damage to be wrought by the carbon tax has been the most successful yet utterly dishonest scare campaign of modern times.
But now Labor is preparing to return the compliment. Prevented by all his crocodile tears over Labor’s ”debt and deficits” from acting on his promise to return the budget to surplus forthwith while still introducing a tax cut, Abbott is now giving the appearance of action by promising yet another review of the tax system, this time not excluding the goods and services tax.
So Labor is gearing up for another scare campaign on the GST, which will be dishonest not because an expansion of the tax is unlikely – it’s highly likely within a few years – but because Labor will portray it as unneeded and economically disastrous, all the while standing ready to benefit from the tax when the party next returns to office.
The pressure for more revenue from the GST is the clearest, most immediate reason for believing we’ll be paying a higher proportion of our incomes in tax in the future. It has turned out not to be the great ”growth tax” and saviour of the state governments.
The era in which households were running down their savings, thus allowing consumer spending to grow perpetually faster than household income, has ended and won’t be returning. What’s more, the two main areas of household spending excluded from the GST (apart from food) – health and education – are growing faster than the spending included, meaning the tax applies to an ever-declining proportion of total consumer spending.
Since the states are so heavily dependent on revenue from the GST to finance their own considerable spending, this a big worry for the premiers, who by now must be desperately hoping a way can be found to raise the rate of GST or broaden its scope, or preferably both.
What’s a problem for all the premiers becomes a problem for Canberra. And big business is partial to higher GST, hoping the proceeds could be used to cut the rate of company tax (vain hope).
It’s often charged that most of the many budget ”savings” Swan boasts of are actually increases in taxation. It’s true. But note this: last week Abbott warned he reserved the option of implementing all of Labor’s savings if he gets into power (no matter what nasty things he’d said about them at the time).
The disability insurance scheme represents a clear extension of the social safety net. Nothing could make more sense than saying such an extension would need to be covered by higher taxation.
Yet Julia Gillard, proud mother of this historic reform, lacked the courage to propose such an obvious measure until forced by budget realities just a week or two ago.
But here is the point: No-new-taxes Tony immediately embraced a 0.5 percentage point increase in the rates of income tax. And voters copped it almost without murmur. The era of higher taxes is dawning.

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APPLE’S TAX ARRANGEMENTS
BITING CRITICISM

The Economist, 21 May 2013

COMPANIES such as Apple and Google are renowned for their ground-breaking technological innovations. They have also put a great deal of effort into reducing the amount of tax they pay on the mountains of cash those innovations produce. Their tactics are now attracting the attention of governments, who have been putting tech firms’ tax strategies under a microscope. Last week, Google came under fire from British politicians, one of whom publicly accused the internet giant of using unethical methods to avoid paying its fair share of tax. The company says it has done nothing wrong.
This week it is Apple’s turn to feel the heat, but on the other side of the Atlantic. On May 20th, a day before Tim Cook, the company’s boss, was scheduled to appear in front of the Senate’s Permanent Subcommittee on Investigations, the committee’s investigators unveiled a report that claimed Apple had used a complex web of offshore entities to pay little or no tax on tens of billions of dollars it had earned outside America.
According to the report, between 2009 and 2012 Apple avoided paying tax in America on at least $74 billion of profits by setting up subsidiaries in Ireland that had no purpose other than to ensure these profits were shielded from tax. The investigators did not find Apple had broken any laws, but they questioned its use of multiple subsidiaries in Ireland to report profits when those subsidiaries had no offices or other physical presence in the country. Carl Levin, the subcommittee’s chairman, said Apple had “sought the Holy Grail of tax avoidance” by creating “offshore entities holding tens of billions of dollars while claiming to be tax resident nowhere”.
One Irish subsidiary that the investigators singled out is Apple Operations International (AOI), which had not filed a tax return in Ireland, America or any other country for the past five years. Although it was incorporated in Ireland, AOI kept its bank accounts and other financial matters in America. Given the differing ways in which both countries assess whether a firm is liable for tax, this allowed Apple to avoid paying tax on AOI’s income of $30 billion between 2009 and 2012.
Apple was clearly anticipating a hostile reception on Capitol Hill. Ahead of Mr Cook’s appearance, the company released a copy of the testimony he plans to deliver to the subcommittee. Among other things, this notes that Apple paid nearly $6 billion in taxes in America in its 2012 fiscal year and claims that this probably makes the firm the country’s biggest corporate taxpayer. It also says that its subsidiaries in Ireland, where it employs almost 4,000 people, play an important role in its international business activities. And it strongly objects to the implication that AOI is nothing more than a shell company. Also responding to the report Ireland’s deputy prime minister, Eamon Gilmore, on May 21st vigorously rejected the charge that his country encouraged companies to set up operations there to avoid tax, and instead blamed the tax systems in other jurisdictions.
Whatever the outcome of the Senate’s committee hearing, the issue of corporate taxation is likely to remain a controversial one. Sir Roger Carr, the head of the Confederation of British Industry, has warned David Cameron, the British prime minster, to stop moralising about companies’ tax arrangements and to keep criticisms “grounded in fact”. For its part Apple, which holds more than $100 billion of cash abroad, is likely to get further scrutiny. In his testimony, Mr Cook will call for an overhaul of the tax regime in America to encourage companies to repatriate more money. Eric Schmidt, Google’s executive chairman, has urged policymakers to consider reforming international tax law, too. The OECD is due to deliver its thoughts on how to change the present system to the G20 in July. Its conclusions will be required reading in Silicon Valley.

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JESSICA IRVINE TAKES A LOOK AT THE GOODS AND SERVICES TAX (GST)

Jessica Irvine, The Courier-Mail, 21 May 2013

Jessica Irvine thinks the current budget woes mean the nation needs to talk about revamping the GST.
THE GST has become the Lord Voldemort of taxes: the tax that must not be named. I get it: nobody wants to pay tax.
But I also know most people want health care when they’re sick, police protection when their home is broken into, an education for their child and income protection when they fall on hard times.
Tax – hate it as we may – is the price we must pay for all the public services we want to enjoy. And tax has to come from somewhere.
And just as it matters how efficiently taxpayer money is spent, it also matters how efficiently taxes are raised.
All taxes distort behaviour and stop transactions from occurring that would otherwise have been beneficial to individuals in society.
Economists call the value of all these foregone transactions as a “deadweight loss” to society.
Precisely because we hate tax so much and seek to avoid it so keenly, it turns out that the most efficient taxes are the ones we can’t avoid.
When we tax incomes, people can respond by working less. When we tax companies, they can reduce their spending and investment.
So the gold standard for taxation is to tax things that can’t move.
Land is a good target for taxation. Minerals are another, buried deep in the ground. Consumer spending is also relatively fixed.
The goods and services tax – essentially a tax on consumption – is a relatively efficient tax for precisely the reason why it is a much hated tax: it’s impossible to avoid. Every dollar we can raise from taxing consumption is a dollar we don’t have to tax on business profits and wages. It’s time we set aside our phobia of the GST. Tony Abbott must hold the line against Labor’s scare campaign and include the GST in his tax review.
Labor gagged Ken Henry from expressing a view on the GST in his “root and branch” review of the tax system. But even he managed to get in a sneaky reference to the need for “consumption taxes” to rise in the future. That’s code for: increase the GST.
Most economists agree we should increase the GST, either by expanding it to include goods and services currently exempt, such as food, health and education, or by lifting the rate. There is a case for both.
HERE are my top 10 reasons why we should increase the GST:
1) A tax on consumer spending is a relatively efficient tax because it’s hard for people to avoid paying it. Let’s face it: we’ve all gotta eat.
2) The GST is a powerful revenue raiser for government. According to estimates by Deloitte Access Economics, extending the GST to food would raise about $6 billion. Extending it to health and education services would raise another $3 billion each – or $12 billion all up. Lifting the GST rate from 10 per cent to 12.5 per would raise about another $12 billion. Voila! Surpluses as far as the eye can see.
3) Part of revenue raised by increasing the GST could be used to compensate low and middle-income households for higher prices. This is how the original GST was introduced.
4) GST revenue could also be used to fund the abolition of other inefficient taxes. Stamp duty is a particularly bad tax because people seek to avoid it by not moving house. Older couples stay in houses that are too big. Young families stay in homes that are too small. Abolishing state-based stamp duties on property transactions would help make housing more affordable.
5) Increasing the GST would provide cash-strapped state and territory governments with a more reliable source of revenue to provide front-line services.
6) Our rate of GST is low compared with other countries. Many European nations impose a “value added tax” of 25 per cent, including Denmark, Finland, Sweden and others. Most of these nations have discounts for essential items such as food, which are taxed at 15 per cent.
7) Our GST is more than a decade old and has never been changed. NZ started out with a GST of 10 per cent in the mid-1980s but recently increased it to 15 per cent. They are now on schedule to get back into surplus in 2014-15, a year before us.
8) Small business would welcome an expansion of the GST to food and other exempt services as it would reduce compliance costs. Today, shop-bought biscuits attract the GST, but the flour, water and eggs required to bake them are GST-free. Figuring out which is which is a hassle.
9) The GST is a good tax for an ageing population. As Baby Boomers retire, we’ll have fewer workers to pay income taxes, meaning a greater tax burden on working Australians. But the swelling ranks of retirees are not exempt from GST.
10) As the population ages, we will spend more on health services, which are currently exempt from the GST. This opens up a hole in revenues that will only increase. Health spending is what economists call a “luxury good” – we spend more on it as our incomes rise, meaning if we don’t tax it, GST revenues will grow more slowly than spending as a whole.

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TAX REVIEW MUST INCLUDE GST: TAX INSTITUTE

Ed Logue and Colin Brinsden, The Sydney Morning Herald, 21 May 2013

A review of the taxation system must include everything, even the impost that is treated like Harry Potter’s arch-enemy by federal politicians, a professional tax body says
Shadow treasurer Joe Hockey has flagged the GST will be included in a review of tax reform if the coalition wins the September 14 election.
Any changes would have to be driven by the states as they are the main beneficiaries, but senior counsel at the Tax Institute Robert Jeremenko has called time on political scaremongering over the GST.
“The GST has been the tax that not dare speak its name for far too long,” he told AAP on Tuesday, coining a phrase frequently used in the Harry Potter book series when referring to Harry’s arch-enemy Voldemort.
“It is only now we are starting to see the beginning of a mature political debate around to consider the GST when looking at a tax reform white paper.”
Federal Treasurer Wayne Swan said any change to the breadth or rate of the GST would “smash” low and middle incomes earners.
“Its extension, for example to food, would have a dramatic impact on the spending power of low and modest incomes,” he told reporters in Adelaide on Tuesday.
Labor oppose any change to the GST.
The GST rate has been 10 per cent since it was introduced in mid-2000, with fresh food, health and education exempt from the impost.
A report from think-tank the Grattan Institute in 2012 calculated broadening the GST base would raise an extra $31 billion.
Mr Jeremenko said any changes to the GST would need to offer compensation for those who could not afford increases from the impost.
Former NSW premier Nick Greiner said the perilous public finance conditions state governments faced demanded a review of the consumption tax.
Mr Greiner, who co-authored a government review into the distribution of GST revenues, said the tax should not be frozen “forever and a day”.
NSW Premier Barry O’Farrell, his West Australian counterpart Colin Barnett and ACT Labor Chief Minister Katy Gallagher have backed a review of the GST.
Victorian Treasurer Michael O’Brien attacked NSW for not axing taxes such as stamp duty on non-marketable securities.
Mr O’Brien said Victoria had scrapped a range of state-based taxes in return for GST revenue.
Mr Jeremenko said Australians expected a certain amount of government spending and a review of the tax system was needed for that expenditure to be sustainable.
Most countries with a consumption tax, like Canada, have altered their rates, up or down, in the past decade.
The Rudd government excluded consideration of the GST as part of the Henry tax review in 2010.

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FEDERAL GOVERNMENT BACKED STUDY INTO FAT TAX ON FAST FOODS

Steve Lewis, News Limited Network, 20 May 2013

A GOVERNMENT backed study is investigating whether to back a fat tax on McDonalds, KFC and other fast foods in a bid to tackle Australia’s obesity epidemic.
Despite criticism that increasing junk food prices will hit the poor, the Government’s preventative health agency – ANPHA – is funding the most comprehensive study ever into the potential tax change – to the tune of $463,000.
The public is being asked to give feedback on paying more for hamburgers and other fatty foods with a “citizens jury” to debate next weekend whether shifting tax scales is the most efficient – and equitable – means of addressing the nation’s weight problem.
ECONOMICS KEY TO TACKLING OBESITY
With two-thirds of Australian adults considered overweight, research project leader, Griffith University’s Tracy Comans, says failure to act will lead to “catastrophic” results for the health system.
“We need to look beyond blaming individuals and towards the structural things in our society. Are we okay with junk food being cheaper and easier to buy than good quality food?” says Dr Comans, from the Centre for Applied Health Economics.
Zilla van den born, 24, eats a Big Mac from McDonalds at Bondi Beach, Sydney. Picture: Kristi Miller
But critics of a fat tax – including the food industry – claim it will unfairly punish the poor and want governments to focus on promoting healthier and more active lifestyles.
The three-year project – costing $463,442 – is considering “the cost-effectiveness and consumer acceptability of taxation strategies to reduce rates of overweight and obesity amongst children in Australia”.
Fourteen member of the public will spend next weekend in Brisbane debating the merits of a fat tax and listening to health experts, GPs and food industry representatives.
A spokesperson for Health Minister Tanya Plibersek said: “The Commonwealth Government has already commissioned an independent review of the Australian taxation system that did not recommend the introduction of a taxation system designed to decrease the production, promotion and consumption of unhealthy food and beverage products.”
“Our preferred approach to actively educate and encourage Australians to adopt and maintain a healthy diet rather than to legislate.“
Research reveals that mothers who eat junk food while pregnant are setting up their babies for obesity.
“With regard to the Australian National Preventive Health Agency project, this is being funded by the ANPHA as part of their research grants.
“The APHA is a statuary authority which reports to all Australian health ministers and makes its own decisions of where to allocate its research money.”
Dr Comans argues that Australia cannot afford to put the issue of obesity in the too hard basket.
“In 20 to 30 years, the consequences (of obesity) in terms of strokes, heart disease, kidney and liver failure are going to be catastrophic for our health care system,” she said.
But the CEO of the Australian Food and Grocery Council Gary Dawson said the research project was “a complete waste of health dollars on a discredited idea”.
Mr Dawson said Denmark had abandoned the use of a “fat tax” after a year.
“It raised food prices, hit the poorest the hardest and failed to bring about any measurable public health benefit – a shocking policy trifecta that no sensible government would want to emulate,” he said.
“Instead of punishing low income earners how about a serious effort to drive more active lifestyles. Obesity is about energy in energy out, not about any particular food.”
Australia’s peak medical lobby and many health researchers also want the option of a fat tax explored – even though the Henry tax review was cool on the idea.
Steve Hambleton, Australian Medical Association federal president, says a national debate is needed about using the tax system to make healthy food more affordable and fast food more expensive.
“We do need to think about the tax system – there’s a need to explore all options,” Dr Hambleton said.”Rather than pitch it as a ‘fat tax’, it’s more `how can we cross subsidise the right foods to make them more affordable’,” he said.

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THOSE INCOME TAX CUTS DON’T SEEM SO GREAT NOW

Matt Grudnoff , The Drum, 16 May 2013

Australia’s windfall revenue is gone and our structural hole has been revealed. How different the debate would be if Howard’s income tax cuts had never occurred, writes Matt Grudnoff.
Federal government budgets are always strange affairs. They are billed as fact-based, hardnosed economics, when in fact they are far more about political theatre and posturing.
While the budget is supposed to reveal the economic credentials of a government, most economists are left shaking their heads.
Take the debate around the surplus. Both the Government and the Opposition seem to believe that a surplus as soon as possible is incredibly important. Yet most economists (academic economists, not those who are paid to hold strong views) would have no problem with the budget being in deficit given the current economic conditions. Put simply, there is no economic case for a budget surplus.
The political attacks over the deficit and claims about budget responsibility are also very strange. While the Government has a fair amount of control over the final budget position, its power in this area is by no means absolute.
The economy impacts the budget much more than the budget impacts the economy. When the economy is booming, incomes, profits and spending all increase and this leads to higher revenues for the government. The opposite occurs when the economy is in a downturn. The booms and busts of the business cycle have been regularly occurring since the beginning of the industrial revolution, and governments have only been able to lessen their impact.
A good example of this is the mining boom, which has been driven mainly by economic growth in China. Obviously the Australian government has little to no influence over the Chinese economy, and yet the growth in the Chinese economy has had a big influence on the budget.
The other factor that lessens government control over the budget is previous budget decisions. The Labor Party is finding this out the hard way as it struggles to bring the budget back into surplus. Large income tax cuts made from 2005-06 to 2008-09 have created a structural hole in the budget that the government is having a lot of trouble overcoming.
The income tax cuts from 2005-06 cost this year’s budget about $40 billion. If those tax cuts had not occurred, this week’s budget would have been a surplus, not a $19.4 billion deficit. The slowdown in the economy has shown these income tax cuts to be unsustainable.
In the years leading up to the GFC, the government’s budget swelled, driven by company tax revenues which increased more than 50 per cent between 2004-05 and 2007-08. Strong economic growth underpinned the budget surpluses and the increase in revenues was used to fund income tax cuts. This made the budget unsustainable since the growth in revenue had been created by the temporary boom and it was used to make permanent tax cuts. The tax cuts stripped away a quarter of the income tax collected in 2012-13.
Governments can cut taxes sustainably if they increase taxes in other areas or reduce spending. The income tax cuts in the lead-up to the GFC did neither; rather, they were funded by a temporary windfall gain from a booming economy. From then on it was just a matter of time before the economy returned to more normal economic conditions and the structural hole was revealed. With such a large amount of income tax taken out, the government is now struggling to bring the budget back to surplus.
Consider how different the debate around the NDIS and Gonski would be if the Government had generated an additional $40 billion in revenue. Instead of a slow lead-in for both, it’s possible that those living with a disability and those caring for them could have been helped far sooner. It’s possible that kids going to disadvantaged schools could have been helped sooner.
Budget time has become a great big show in which the government and opposition play their parts. But these parts, like a good Hollywood action movie, bear only a passing resemblance to reality.
A better understanding of the structure of the budget would solve a number of its problems and reveal many others to be the creation of politicians’ imaginations.
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YOUNG FAMILIES TO BEAR BRUNT OF BUDGET CUTBACKS

PATRICIA KARVELAS, The Australian, 18 May 2013

MOST families with young children will be worse off by 2015-16 under Wayne Swan’s budget cuts, despite the Gillard government’s mantra about the struggles of “modern families”.
Analysis by the University of Canberra finds the reduced benefits and higher taxes in Tuesday’s budget hit families the hardest while singles and couples without children will be mostly better off as their carbon bill falls.
The National Centre for Social and Economic Modelling analysis of the spending and saving measures of the budget concludes singles and couples are initially only affected by the increase in the Medicare levy.
Many singles and couple-only households are pensioners so the impact is reduced further since they do not pay any tax. NATSEM principal researcher Ben Phillips said the loss in dollar terms was greatest for households in the top 60 per cent of incomes.
He said the impact for the lowest 20 per cent of household incomes would be small over the next two years but they gained in the later years thanks to savings from a lower carbon price, because their household compensation would mostly remain unchanged from existing levels.
The NATSEM study finds the overall financial impacts are a drop in disposable income this year of about $100 a year, followed by $500 in 2014-15 and $300 a year in the later years. But the impacts are most dramatic for a family with children. By 2015-16, families with children at the highest income level of $110,000 and more go backwards by about $850 a year.
Middle-income families with children – on incomes between $60,000 and $80,000 – lose more than $1050 a year thanks to cuts in family payments, which the higher-income families don’t get.
Low-income singles and couples without kids will be better off by up to $205 a year by 2015-16 as a result of a lower carbon tax. Higher-income singles and couples will be moderately worse off as their higher taxable incomes are subject to the now increased Medicare levy, but some of this is clawed back through lower carbon tax outgoings.
“The family type that is most heavily impacted from this budget is high-income couple families with children in 2014-15,” Mr Phillips told The Weekend Australian.
“These families will be behind by $1220 per year. This impact is reduced in the later years as they benefit the most of any family from the carbon price reduction.
“The major winner from the budget will be low-income couples without kids in 2014 … In 2015-16, their carbon price impact more than halves, yet their carbon price compensation will be largely untouched.”
Mr Phillips said budgets under then Coalition treasurer Peter Costello had been very pro-family, with increases in the Family Tax Benefit, the Baby Bonus and Child Care Rebate.
“This budget is the first for many years to actually make some obvious cuts that go beyond just tightening up means-testing arrangements via indexation freezes,” Mr Phillips said.
The impact on households from all the policy changes increases in 2014-15 to $4.5 billion and in 2015-16 to $6.2bn. In 2013-14 the impact is only $850 million.
“When we account for the reduced carbon price, the household impact is only about $3bn per year with savings of about $3.3bn in lower carbon costs, about $370 per household on average,” he said.
“The winners are most strongly distributed around lower-income households.
“By the later years, about 35 per cent of households are better off and the rest are worse off.”
He added that, in this budget, “the hit is directed more strongly towards families and middle-upper-income households.
“After many years of personal income tax cuts and more generous welfare payments, this would seem necessary.
“Ideally, some of these savings would be derived from a more robust tax concession reductions.
“Arguably, there is less economic and social harm in trimming concessions rather than trimming family payments or increased personal income taxation.”

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TARGETING BUDGET WASTE NEEDS TO FREE UP SPENDING FOR POVERTY ALLEVIATION: ACOSS

ACOSS Media Release, 17 May 2013

The Australian Council of Social service has said it is very concerned with elements of the Opposition’s Budget reply speech that would see income reduced for the poorest people in our community.

“On the same day that the House of Representatives passed a motion declaring that the rate of Newstart Allowance is too low, it is particularly disappointing to hear that the Opposition plans to take away a $4 a week supplement that provides much needed extra support. For these households, every dollar counts,” said ACOSS CEO Dr Cassandra Goldie.

“This is inconsistent with the overwhelming evidence and widespread consensus in the community that allowance payments like Newstart are way too low. The only logic in withdrawing the Income Support Bonus would be to make way for a clear commitment to increase the meagre $35 a day base rate of these allowances.

“With one in eight people in poverty in Australia we need to be doing more to alleviate poverty, not less. It’s hard to see how stripping $210 from more than one million people on the lowest incomes will make the situation better.

“The announcement that the Low Income Superannuation Contribution will be scrapped will also hurt low income earners who are most in need of a boost to their retirement savings. Superannuation tax concessions are already skewed towards the top end of income earners, yet this plan will further disadvantage those on lower incomes.

“We understand the current fiscal challenges and agree that we need bold action to strengthen the Budget if we are to fund important social infrastructure programs for our nation. We are pleased that it appears that some of the savings in this area will have bi-partisan support, such as the Medical Expenses Tax Offset. The reality is that most of the current waste in the Budget is on the revenue side, in the form of unsustainable tax breaks and concessions that predominantly benefit people on higher incomes. These are the areas we should be targeting for reform, not the income to people who are already living below the poverty line.

“There is no doubt that whoever forms government after the coming election will have a major task ahead in securing a sustainable revenue stream for vital services and infrastructure. These measures can be done with wide public support by targeting waste, not the essential services and benefits for people who are struggling the most.

“We welcome the proposal to develop a white paper to progress tax reform. Ultimately we need comprehensive tax reform that takes Henry Tax review proposals forward.

“We also need a national conversation about what benefits and services we can expect from government to focus on unmet needs, such as disability care, health, education and the alleviation of poverty in our country. Public spending should be rebalanced towards those who need support the most,” Dr Goldie said.

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ABBOTT BUDGET REPLY: MIND THE GAP BETWEEN RHETORIC AND REALITY

Bernard Keane, Crikey, 17 May 2013

How far has our understanding of the Coalition’s fiscal policy advanced as a result of Opposition Leader Tony Abbott’s budget reply last night?
Answer: not particularly far, and what detail we got tends to confirm what already seemed to be the case. That is, assuming Abbott is being honest, the Coalition will not run a significantly tighter fiscal policy than Labor. This is despite what Abbott claims is a “budget emergency” of sufficient magnitude that he will reluctantly support Labor’s $30+ billion-worth of tax rises and savings.
If there was a true fiscal emergency, the Coalition would be girding its loins for a serious assault on the budget. However, nearly all of the savings measures announced by Abbott last night (which were additional to Labor’s earlier savings, and most of which were re-announcements) will be directed to funding the $4 billion in carbon price tax cuts and handouts that the Coalition says aren’t necessary.
This is shadow treasurer Joe Hockey, just a few weeks ago:
”Let me be very clear, if there is no carbon tax, there is no need for compensation because if you don’t have a carbon tax, you don’t have injury, and by its very design, the carbon tax is meant to cause injury, it’s meant to change behaviour, and that’s why the government compensates.”
Hockey was exactly right, of course, but his logic has been rejected as politically inconvenient by Abbott. The result: a “budget emergency” so bad you can throw $4 billion at taxpayers for no reason.
That decision inevitably makes the overall savings task for the Coalition more difficult. For example, in 2010, Abbott said in his budget reply that his plan to slash 12,000 public servants would “pay for the Coalition’s direct action on climate change policy, the Green Army and the retention of the current private health insurance rebate”.
But last night, Abbott said the 12,000 cut was among his “specific savings” that would “cover keeping tax thresholds and pension rates without a carbon tax to fund them”.
So opposition climate spokesman Greg Hunt’s risible Soil Magic / Direct Action scheme now has to be funded from other savings (“it will be costed, capped and fully funded from savings,” a Hockey spokesman said). In a perfect world, this will be a prelude to the Coalition abandoning it altogether, since simply sitting and ignoring climate change would be better than blowing billions on winner-picking nonsense.
“The net result … is a credibility gap between the opposition’s apocalyptic fiscal rhetoric and its proposed response to said apocalypse. But it’s a comforting gap.”
The actual new cut identified by Abbott consists of delaying the increase in compulsory super to 12% — at least, unlike former PM John Howard and then-treasurer Peter Costello in 1996, Abbott hasn’t lied about supporting the increase before the election as a prelude to dumping it afterward. This joins the previously announced 12,000 ex-bureaucrats, axing the low-income super contribution and the reduction in our humanitarian intake. Abbott also “confirmed” he would dump the mining tax-funded Family Tax Benefit supplementary allowance (which Hockey actually backed last year), although Abbott was careful not to use the phrase “Family Tax Benefit” when saying he’d dump it, merely referring vaguely to “people on benefits” which of course sounds much more like a war on dole bludgers than class warfare.
This reduction in Australia’s humanitarian intake, which reverses the recommendation of the government’s Houston panel, is both bad policy and morally reprehensible. The Coalition is proposing that one of the world’s richest countries cut its intake of bona fide refugees by over 30%, while at the same time purporting to be serious about discouraging asylum seekers from trying to reach Australia by boat. Seriously reducing the intake of refugees who seek to be resettled in Australia through appropriate, internationally recognised processes sends a strong signal that you maximise your chances of being resettled here by coming by boat.
The net result in budget terms is a credibility gap between the opposition’s apocalyptic fiscal rhetoric and its proposed response to said apocalypse. But it’s a comforting gap. The last thing an economy forecast to grow below trend despite a 1% of GDP deficit and record low interest rates needs is a new government ripping a huge amount of demand out of the economy.
Of course, an incoming Abbott government could have a mini-budget and unleash an unheralded round of massive cuts (“to the bone”!), just as Labor is predicting. Moreover, we’ve only heard one-half of the opposition’s budget reply; Hockey will offer his next week, and may detail further cuts. But on its face, Abbott’s reply is appropriate and sensible in terms of the level of fiscal stimulus the economy needs.
Abbott also appears to have left the door open to GST changes via a tax reform white paper. Yes, of course, there’s been umpteen tax reviews and we don’t need another one. But if Abbott is plotting a course toward fixing the holes in the GST (which would complete the tax reform work of Peter Costello that was ruined by former senator Meg Lees) or expanding it, that’s a welcome sign. Labor has already sought to create a GST bogeyman from it, but all power to Abbott if he’s prepared to use his political capital to improve it.
And even if it looks a bit like he’ll be hitting the ground reviewing, a COAG white paper is welcome as well. Abbott, as he outlined in his book Battlelines, is a strong centralist and wants to override state powers — or at least he did when most states were controlled by Labor. A serious effort to make COAG work more effectively (or dump it as a waste of time?) is also sound policy.
We await Hockey’s response next week. But so far, there’s no evidence to suggest the Coalition is going to differ significantly from Labor on fiscal policy. And that’s pretty much what the economy needs for the next 18 months.

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TAX RULES FOR THE RICH ARE DIFFERENT, JUST ASK COMMERCE NOMINEE PRITZKER AND SENATE CANDIDATE GOMEZ

Citizens for Tax Justice, 16 May 2013

First it was Mitt Romney, and now two more aspiring public servants are in the spotlight for questionable tax maneuvers – Penny Pritzker, President Obama’s Commerce Secretary Nominee, and Massachusetts Republican Senate candidate, Gabriel Gomez.  The complex tax avoidance strategies exercised by both these two candidates for federal office demonstrate the stunning extent to which wealthy individuals of all stripes can play by a different set of tax rules than everyone else.
Avoiding Every Last Penny of Taxes
While many wealthy families go to great lengths to avoid taxes, the Pritzker family (most famous for it’s ownership of the Hyatt hotel chain) is unique in its role as “pioneers” in the use of offshore tax shelters. Many of its existing offshore trusts were set up as long as five decades ago, and some have allowed the family to continue benefitting from tax loopholes that have long since been closed.

As the graphic below from a 2003 Forbes story details, one of the primary ways the Pritzker family uses offshore trusts to avoid taxes is by having income from their businesses funneled into offshore trusts. Those trusts then pay debt service to a bank, owned by the family trust, that loans that money right back to the business. The upshot is that all the taxable profits disappear and the family wealth accumulates unabated. A more recent Forbes article looking at the Pritzker family fortune notes that these trusts were not at the margin but rather “played a substantial role in the growth of the Pritzker fortune.” The same article notes that this fortune makes up the vast majority of Pritzker’s $1.85 billion empire and has allowed 10 members of the Pritzker family to earn a spot on the list of Forbes 400 richest people in America.
When the New York Times asked Penny Pritzker for her thoughts on the ethical implications of her family’s use of offshore trusts, she remarked that the trust was set up when she was only a child, after all, and that she does not control how the offshore trusts are administered. Her continued vagueness on these issues makes it likely that she will face more questions about her views of offshore tax avoidance more generally next week when she goes before the Senate for her confirmation hearing.

While Pritzker’s personal involvement with her family’s most infamous tax avoidance legacy is unclear, it is clear that she has actively used tax avoidance strategies in her own professional and private life. For example, a family member in this Bloomberg News profile from 2008 recounts one of her very first assignments working for Hyatt, which was to set up a like-kind property exchange to help avoid taxes on a property owned by Hyatt.
It turned out Penny was a natural at this particular tax avoidance scheme, in which a company takes deductions for the purported depreciation of their property and then sells the property at an appreciated price, but avoids paying capital gains tax by swapping the property for another like-kind property. (Originally created for use by farmers trading acreage, this tax break is a perfect example of a loophole in the tax code that is abused by companies and should be eliminated (PDF).)
In her personal finances, Penny Pritzker has run into criticism for making 10 appeals to lower the property tax assessment for her mansion in Chicago’s Lincoln Park. Like many wealthy taxpayers, Pritzker is able to retain lawyers who, through repeated appeals, have been able to save her an estimated $175,905 (PDF), even though their appeals have only succeeded half the time.
Gabriel Gomez and the Façade of Charitable Donations

While not on the same scale, according to the Boston Globe, U.S. Senate candidate Gabriel Gomez claimed a $281,500 income tax deduction in 2005 for “pledging not to make any visible changes to the façade of his 112-year-old Cohasset home” because the value of such an agreement is considered a charitable deduction by federal law. The only problem is that local laws already prohibit he and his wife from making any changes to the exterior of their home, meaning that his “agreement” to leave the façade alone is more like complying with local laws rather than a choice, so it may not have an actual “value” that is deductible.

In fact, just five weeks after Gomez claimed this deduction, the IRS listed the abuse of historic façade easements as one of its “Dirty Dozen” tax scams. Moreover, the organization with which Gomez made the agreement, the Trust for Architectural Easements, has been criticized by the IRS, Department of Justice, and Congress for encouraging tax avoidance. Altogether the IRS estimates that the Trust cost American taxpayers $250 million in lost revenue.
Fortunately for Gomez, the IRS did not challenge his use of this deduction, as it has with hundreds of others. If they had done so, they likely would have rejected the deduction and Gomez would have had to pay thousands in back taxes and an additional penalty. For his part, Gomez’s lawyer argues that the restrictiveness of the agreement goes further than local zoning laws, but it appears unlikely that the additional restrictions are so great as to justify such a substantial deduction.

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BUDGET: GAPING HOLE FOR POOREST REMAINS

Pro Bono Australia News, 15 May 2013

Welfare peak body ACOSS says while it welcomes the Federal Government’s vision to secure disability care and dental and schools reform in the Federal Budget, it cannot believe that there’s no income relief for the people who are the poorest.
“We praise the move by the Treasurer to lock in government expenditure on crucial social reforms such as education and disability care, in some cases for a decade.
“We have also been strong supporters of the more equitable and effective system for dental care in Australia and that begins with two-thirds of all children in this Budget. These are not only visionary reforms but long overdue,” ACOSS CEO Dr Cassandra Goldie said.
“However, we remain deeply concerned at the failure to reduce the rate of poverty in Australia by increasing the single rate of Newstart and other allowances.
“While we welcome the modest easing of income rates for people on Newstart and other allowances, the Government has failed to assist the four-fifths of Allowance recipients who are unable to obtain paid work.
“Each year we fail to act, this gaping hole in our safety net grows. One in eight people, including one in six children, are living in poverty and an increase in the lowest social security payments would have the most immediate and direct impact in reducing it.
“On the savings side, there are some incredibly important measures in this Budget,”
Dr Goldie said.
“In addition to the welcome increase in the Medicare levy to fund DisabilityCare Australia, we are pleased that the Budget makes significant inroads into closing tax loopholes and inefficient tax arrangements.
“With tax receipts down by over $20 billion from the pre-GFC period, we must pull back from generous tax breaks that are not delivering on policy outcomes and eroding our tax base.
“ACOSS advocated the extension of the Medicare Safety Net threshold, the abolition of the medical expenses tax offset, the capping of self-education expense deductions and the tightening of the thin capitalisation rules, all of which we welcome in this Budget.
ACOSS has also welcomed the integrating of the baby bonus into the family payments system so that it is better targeted but remain concerned about reductions in payments for the poorest families.
“The next step to secure our economic and social progress must be to strengthen revenue. Otherwise we face painful cuts to essential expenditure down the track. Australia is the 5th lowest taxing country in the OECD. If we want a decent safety net, and universal health education and dental services, as well as the housing and infrastructure for present and future generations, we need a sustainable tax base,” Dr Goldie said.
The Brotherhood of St Laurence has called on all political parties to outline an adequate benchmark for Newstart and to publicly commit to a schedule for achieving it following the Budget decision overnight.
“The present allowance fails to keep job-seekers out of poverty,” Brotherhood Executive Director Tony Nicholson said.
“We are concerned about the widening gap between Newstart and pensions, which do better at providing a minimum acceptable standard of living.”
“Unemployed people include those with low levels of education and limited job experience, single parents, people with disabilities, indigenous people and those who grew up in jobless households. Our research shows these are the very people who have benefitted the least from Australia’s enviable economic growth over the past decade.
“We welcome the $300 million allocated in this Budget for measures to help job-seekers in transition to work, but we now call on both parties to pledge a much greater investment to build the capacities of the long-term unemployed.
“This is not a ‘cost’; it is an investment in social infrastructure that is as vital as building roads and ports,” Nicholson said.

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A BUDGET FOR CITIZENS — BUT WHERE IS THE TAX REFORM VISION?

Miranda Stewart, The Conversation, 15 May 2013

Budget night has come and gone again. For those sad folks (I count myself among them) who follow tax and fiscal policy obsessively, it’s the most glamorous night of the year. But the budget does matter — for all of us. Decisions passed by Parliament each year define how Australians will be educated…
Budget night has come and gone again. For those sad folks (I count myself among them) who follow tax and fiscal policy obsessively, it’s the most glamorous night of the year.
But the budget does matter — for all of us. Decisions passed by Parliament each year define how Australians will be educated, access health care, support the needy, provide overseas aid and fund rail and public technology – and how we will raise the taxes to do it.
What happens on budget night?
On budget night, the Appropriations Bills for the coming year’s spending are introduced into the Parliament, to be debated and passed or government stops altogether, as it did for Whitlam in 1976.
Only 20% of annual expenditure is up for decision in the budget bills, as 80% of expenditure is authorised by special legislation – for example, to cover age pensions (see this for more detail). Still, this is about $80 billion a year, which can make or break new policy or infrastructure decisions.
We also get to see the government’s five-year plan. Australia’s three-year electoral cycle fosters short-sighted governing. The Medium-Term Expenditure Framework requires estimation of revenues and expenditures for five years from 2012-13 to 2016-17. Introduced in 1987 by the Hawke-Keating government, it is a strength of the budget process and keeps our budget on a more even keel than that of many other countries.
In this budget, the Gillard-Swan government tries to take an even longer view, projecting funding for the next seven years for the major education and DisabilityCare programs. It’s an interesting attempt to take the focus long term, as called for by our intergenerational reports.
Don’t worry about the deficit
All the reports are saying this not a typical election year budget. What they mean is that it’s short on handouts that we usually see every election year. That’s a good thing.
That headline figure of the deficit — $18 billion — does focus our attention, as citizens, on the cost of government. Politically, the deficit or surplus has become a symbol of bad or good government. Balanced budgets are important: we need to raise adequate taxes to fund public goods, infrastructure and the welfare state. Ongoing deficits are ultimately funded by increased government debt or future taxes.
But the deficit in any particular year does not tell us whether the government’s policies are smart or sustainable. Australia’s deficits are small relative to the size of the budget, and Australia’s government debt is among the lowest in the world.
If the government is spending that $18 billion on education, health and infrastructure, that is probably a better investment than cutting spending.
So what about taxes?
The budget papers include some good tax increases – and a few needed tax fixes. But we are missing a real vision in tax reform that could build a consensus for the future.
It was the right decision for the government to enact an additional 0.5% tax as a top up of the Medicare Levy to help fund DisabilityCare.
This levy will receive general public support. It also has the advantage that it increases the top marginal rate to 47%. Lowering top tax rates has been a major cause of rising income inequality in Australia and other countries since the 1980s. It’s time to reverse that trend. At the bottom end, the Medicare threshold will be lifted, at least for low-income families.
But this government has failed – again – to build on the broad and far-reaching Henry Tax Review recommendations about our core income tax base in Australia.
Why cap education expenses – but leave rental property losses standing?
One example of incoherent tax policy is the government’s proposal to cap individual self-education expenses at $2,000 each year. We should review work-related deductions across the board, along with an examination of how we treat investment income, gains and other expenses in the personal income tax. This proposal does not do that.
The self-education expense cap will hurt Australian students and universities. (I must acknowledge my own interest here.) The target is luxury travel and gold-plated professional conferences. But an individual working for a community organisation who wants to do a Masters in social work part-time and coughs up the dollars to do it is also going to be directly hit. That seems short-sighted.
And if we are capping tax deductions, why is this government not brave enough to cap rental losses being used to reduce tax on salary income? ATO taxation statistics show that rental deductions consistently exceed rental income. In 2010-11, 67% of rental investors made tax-deductible rental losses of $7.8 billion. It’s bad tax policy and bad housing policy.
Business tax fixes but no big picture
The budget proposes some corporate tax fixes, to prevent undermining the Australian tax base mostly by tax planning involving debt.
The business community and profession has been aware of these issues for years, and has even told the government about them. The ATO has recently lost some cases, such as RCFand Mills, in which courts have applied the law and found it does not work as the government expected.
Last year’s Treasury Working Group on Business Tax failed to agree on tax reform without substantial cost to revenue. Australia, and other countries in the G20, are struggling to come to grips with global profit-shifting and international tax co-operation.
It’s good that the government has decided to reform thin capitalisation rules, reducing the basic debt ratio from 3:1 to 1.5:1 to ensure that businesses cannot deduct high ratios of interest on debt against Australian taxable income, while effectively shifting profits offshore.
The government will also fix a flaw in our capital gains tax, to make sure that mining companies cannot avoid tax on sales of Australian mining rights by allocating more of the price to the mining information than to the mining rights. It will examine the offshore banking unit regime that enables low taxation of some Australian bank profits. And it will undertake a review on the cross-border arbitrage that can happen when Australia taxes corporate debt or equity differently from other countries.
These tax fixes will plug some leaks. But the bigger challenge is to build a vision and political consensus to enact long-term reform of our business and personal tax system.
Does Australia’s budget process need fixing?
Business Council of Australia CEO Jennifer Westacott has called for “a comprehensive audit of the scope, size and efficiency of government”.
We certainly should audit government accounts. It might also be possible to have an independent review of revenue forecasts or policy costings. And perhaps we could do a stocktake of government functions — for example, whether there is overlap in what federal and State government agencies are doing – and aim to eliminate that overlap.
But what does it mean to “audit” the scope, size and efficiency of government? Who would do it? Budgeting is a political process and the size and scope of government comes down to us: the citizens.
Australia is not in a fiscal crisis. But our decision-making processes for taxing and spending are under stress from short-term pressures (such as the global financial crisis) and long-term structural changes including globalisation, an ageing population and climate change.
Budget reform should focus on improving processes to build a political consensus among diverse interests – Australian individuals, businesses, the social sector, labour representatives. Only this can achieve sustainable tax reform.

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MIGRANT AND INDIGENOUS REACTION TO FEDERAL BUDGET

Michael Kenny, SBS World News, 15 May 2013

There has been a mixed reaction to the federal budget from migrant and Indigenous community organisations.

Budget allocations show the government has opted to neither change Australia’s current general immigration level, nor the number of places set aside under the refugee and humanitarian program.

Migrant community groups have welcomed additional funding for health and education programs, saying some of the extra funds will be specifically targeted at Australians from a non English speaking background.

However some Indigenous organisations are particularly critical of government plans to cut funding to the representative body for Aboriginal and Torres Strait Islanders.

The Federation of Ethnic Communities Councils of Australia has welcomed the government’s decision to maintain the country’s permanent migration program at 190,000 places and its humanitarian intake at 20,000.

One budget measure is a doubling in the cost of a 457 temporary skilled migrant visa, to $900.

FECCA chairman Pino Migliorino believes the government should carefully consider where it should direct that additional revenue within the Immigration Department budget.

“And in fact what will be a very interesting question will be what will be the use of that money. I think what might be an appropriate use of that extra revenue is to start building settlement services for both the spouses and the children of those 457 visa holders who will be hear for long periods of up to four years or not more,” he says.

Pino Migliorino says he believes migrant communities will particularly benefit from the government’s $10 billion school reforms, with some funding targeted specifically at students whose first language is not English.

And he has also welcomed the government’s $20 million in extra funding for SBS, saying this will help multicultural broadcasting in a highly competitive media environment.

Some refugee advocates have been more critical of the budget, particularly over the rising level of funding spent on immigration detention facilities.

The government expects asylum seeker management costs to blow out by $3.2 billion over the next four years.

Campaign co-ordinator at the Asylum Seeker Resource Centre, Pamela Curr, believes the processing of asylum claims on Nauru and on Manus Island in Papua New Guinea is proving to be too costly.

“It costs one million dollars per person per year- that’s the current rate to detain people on Nauru and Manus Island. It makes no sense. What would create a stronger, fairer and smarter Australia is to accept the asylum seekers and process them from within the community and allow them the right to work at the same time,” she says.

Some Indigenous groups have been particularly critical of the government’s decision to cut funding to a representative body which it created in 2010.

The government has halved its funding allocation to the National Congress of Australia’s First Peoples, providing $5 million a year for three years from 2014-15.

The legal director at the Tasmanian Aboriginal Centre, Michael Mansell, believes the Congress has never been given the support it has needed.

“It was in its teething (early) stages and it was always going to struggle. But of course the real problem is that it wasn’t made clear whether it was to be an advisory body to the Commonwealth government or whether it was to be another ATSIC (Aboriginal and Torres Strait Islander Commission). The problem was that the Commonwealth failed to give it the powers that would enable it to lead the Aboriginal community and be critical of the Australian government,” he says.

Another Indigenous organisation is less critical of the budget.

The National Aboriginal and Community Controlled Health Organisation has welcomed the extra $777 million in funding towards a new Close the Gap partnership over three years.

However the organisation’s Chief Executive Officer, Lisa Briggs, says questions remain over exactly where that money will be spent.

She also questions whether there will be adequate cooperation between the Commonwealth and the states and territories to implement the partnership.

“The National Aboriginal and Torres Strait Islander health plan hasn’t been finalised yet. We’re still yet to see the devil in the detail and what that actual funding commitment will look like. And it is really important that we know sooner rather than later what that detail actually looks like to ensure that the continued efforts that have currently been built up around Close the Gap to get health gains, stay that way,” she says.

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ON ACADEMIC EFFICIENCY AND THE 2013 FEDERAL BUDGET

Matthew Bailes, The Conversation, 15 May 2013

As you may have noticed, the 2013 federal budget is out and, despite his best efforts, Euromoney’s “2011 Finance Minister of the Year” Wayne Swan has missed his earlier predicted budget surplus by almost A$20 billion.
The treasurer is paying the price of introducing the mining tax but ending up in a virtual minefield, and coming out almost empty-handed.
Company tax receipts are down, and the traditional pre-election budget full of sweeteners wasn’t possible without a monster deficit – so the axe has been wielded.
One of the casualties is the university sector.
The efficiency dividend
In an incredibly cynical manoeuvre, the government has labelled its 3.25% cut to future university budgets an “efficiency dividend”.
These cuts are on top of earlier ones already announced, and Universities Australia estimates the total cost to Australian universities will be more than A$3.5 billion.
It’s sobering to remember the Labor was elected in 2007 on the back of an “education revolution”. A more fitting name for the cuts might have been the “education counter-revolution”.
Efficiency is a very nice word, and it would seem that Labor (and I’m sure the Coalition) would love universities to be as ruthlessly efficient as the free market.
In the free market, competition drives down price. To survive, companies are constantly demanding more from their staff, rewarding those who put in long hours and promoting those who make sacrifices to positions of power and influence.
CEOs are expected to demonstrate total commitment, burn the midnight oil and thrive in the pressure-cooker environment that will drive the company to glory.
Of course, this approach has been a disaster for working women at senior levels, particularly those attempting to combine motherhood with careers. In 2012 there was a grand total of 12 female CEOs in charge of ASX500 companies.
Is this what the government wants for academia?
The logic behind “efficiency dividends” is that, in tough times, you trim the fat and find new ways to become more efficient, mirroring the demands of the free market.
The reality is that it’s hard to be innovative when you have a shrinking funding base. Initiatives require new money, and without it universities lose their competitiveness.
Universities will be forced to either reduce the quality of their degrees or quantity and/or quality of their research. This will ultimately make them less competitive, lowering their world and region rankings and and reducing demand for their services.
Good news?
On the plus side, the government will resume the highly successful Australian Research Council’s Future Fellowship scheme.
Announced in 2008 and implemented a year later, the scheme, which awards fellowships to mid-career researchers, is one of the best opportunities for young and mid-career researchers in Australia to establish their research careers with four-year positions.
Another positive is the money to support research infrastructure through the National Collaborative Research Infrastructure Scheme, although that’s only for the next two years. The sector desperately needs a long-term plan for maintaining research infrastructure, and this isn’t it.
So let’s hold the confetti. The cost of these two schemes is much less than the cuts universities are being asked to absorb, and so the net effect of the budget is a major negative for the university sector.
The vision
In 2008, the Review of Higher Education recommended reaching a target of 40% of 25-34 year-olds with a degree by 2020, up from 29% at the time of the report.
It doesn’t take a Nobel economist to predict the cost of this, in terms of implementation, staffing, infrastructure and administration, will be huge – and without a proper tax base it is simply unaffordable.
Fundamentally, what you can teach and examine for in someone with a Tertiary Entrance Rank (TER) of 60-70 is very different from teaching and examining someone with a TER of 90+. But, as the push for higher student numbers increases, so will the pressure on universities to square this (already wonky) circle.
To put it bluntly, there will be an inevitable tension in the system to push some institutions away from research, especially those catering to the lower TER students.
The cuts now on the horizon might accelerate that dichotomy.

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WELFARE GROUPS HAVE MIXED BUDGET REACTION

Sally Sara, ABC News, 15 May 2013

The federal budget has received a mixed response from welfare and community groups after delivering the promise of life-changing funding for Australians with disabilities but cutting back on family payments.
The Government committed $14.3 billion in new money to fund the national insurance scheme DisabilityCare. It will be supplemented by a 0.5 per cent increase in the Medicare levy.
Australians with disabilities and their families say it is a budget they never thought they would never see.
Kathy Breen, whose sister 43-year-old sister Emma has Down syndrome, says it is a huge relief.
For the first time, there will be a safety net if the family is unable to take care of her.
“My mum is 88, and after 43 years, she knows if she passes on, there will be a scheme up and running to help look after my sister,” Ms Breen said.
The historic funding has been delivered despite a $19.4 billion deficit and amid the political pressures of an election year.
Disability Discrimination Commissioner Graham Innes has welcomed the long-awaited change.
“For the first time in Australian history, disability is at the centre of the federal budget, and for people with disability that’s a key result,” he said.
But while there have been gains for the disability sector, there have been cuts elsewhere.
‘Taking money from the poor’
The $5,000 baby bonus, introduced by the Howard government and widely criticised as middle-class welfare, will be axed from March next year.
It will be replaced by an increase in the Family Tax Benefit Schedule A, which will see $2,000 for the first child and $1,000 for subsequent children.
That means 28,000 families who would have received the bonus in 2014-15 will now miss out because the payment has a tighter means test.
An additional increase to the Family Tax Benefit Schedule A has also been dumped, prompting a mixed response from parents.
Some, including Matthew Boswell from Sydney, support the cuts.
“I think it’s fair enough. I am sure that money can be better spent elsewhere,” he said.
But others disagree, including Sydney mother Kamala Cochrane who says many families are doing it tough.
“This government just seems to be taking money from the poor instead of finding other ways to get it from big business,” she said.
Welfare groups are disappointed that jobless Australians did not receive and increase in unemployment benefits.
Dr Cassandra Goldie from the Australian Council of Social Service was one of the leaders of the campaign for a $50-a-week increase in the Newstart allowance.
“The gaping hole in this budget, there is no doubt about it, and we cannot believe that we didn’t see an increase in the unemployment payment,” she said.
Lobby groups are now switching their focus to the campaign for the September 14 election.

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BUDGET: ATO TASKFORCE TO TARGET TRUST MISUSE

Pro Bono Australia News, 15 May 2013

The Federal Government will provide the Australian Tax Office with $67.9 million to target the use of complex tax structures by high net worth individuals to avoid tax.
The funding was announced in the Federal Budget to allow the ATO to target the exploitation of trusts to conceal income, mis-characterise transactions and artificially reduce trust income amounts to avoid or reduce tax.
“It is important that the ATO has the appropriate resources to tackle tax avoidance through complex structures like trusts,” Assistant Treasurer, David Bradbury said.
“Emerging evidence, including substantial ATO data from two recent law enforcement operations, shows a significant increase in the level of trust-based non-compliance.”
“The ATO will target the use of contrived loan arrangements and the promoters of tax avoidance and evasion schemes. The ATO will report regularly to the Government on the types of misuse it is uncovering.
“This compliance work is expected to result in a net gain to revenue of $311.1 million over the forward estimates.
“The Government will also use intelligence gathered by the ATO to inform the next phase of its consultation on trust taxation reform.
“The Government has received a wide range of views on how the tax law could be amended to reduce complexity and compliance costs and ensure that opportunities for manipulation of tax liabilities are minimised. The message from stakeholders is that there is no clear consensus on the best approach to deal with these issues.
“I have therefore asked Treasury to consult with the ATO’s National Tax Liaison Group (NTLG) Trust Consultation Sub-group on the most appropriate way to progress the reform, and in particular to address integrity concerns arising from the mismatch between trust and tax concepts of income,” Bradbury said.
“The NTLG is well placed to advise the Government on these issues with its membership spanning a broad spectrum of accounting and legal bodies, many of which made submissions on the October 2012 policy options paper”, he said.
It is expected that Treasury will report back to Government on the outcomes of the consultation by the end of July 2013.

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BUDGET DISAPPOINTS WELFARE SECTOR

ABC News, 15 May 2013

The Tasmanian Council of Social Service is disappointed there has been no increase to the Newstart allowance in the Federal Budget.
TasCOSS has welcomed the long-term funding commitments to education and disability support.
But the council’s Tony Riedy has told ABC Local Radio unemployed Tasmanians are in dire need of an increase to their fortnightly Newstart payments because many are living way below the poverty line.
“In fact, what’s happened is there’s been an adjustment to the amount that people on those sorts of allowances can earn before their allowance starts to be affected,” he said.”
“But that’s of little comfort to the thousands of Tasmanians who are actually out of work and not able to get any form of employment at all, it won’t affect them at all.”
Meanwhile, the Local Government Association says the halving of federal grants to the state’s 29 councils next financial year is not a concern.
The Federal Government has budgeted $36 million in 2013-14 compared with $70 million this financial year.
But the association’s Alan Garcia says it is just an accounting measure and councils will not actually get less money.
“The Treasurer indicated that he was seeking to bring in a surplus in this year’s budget and one of the accounting measures that was used last year was a lot of payments were made in advance,” he said.
“So over the two year period councils are no worse off.”

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BUDGET: CHARITY DEFINITION DELAYED

Pro Bono Australia News, 15 May 2013

It’s been confirmed in the Federal Budget that the proposed introduction of a statutory definition of charity has been deferred for another six months.
The Federal Government has announced a later start date for the 2011 12 Budget measure Not for profit sector reforms — introducing a statutory definition of ‘charity’.
This measure will now take effect from 1 January 2014, rather than 1 July 2013 as originally announced.
The Treasurer Wayne Swan says this measure is estimated to have a small but unquantifiable cost to revenue over the forward estimates period.
“The new start date will provide time for the Australian Charities and Not-for-profits Commission to develop guidance for charities regarding the definition.
“The proposed statutory definition of charity preserves common law principles and provides greater clarity and certainty about the meaning of ‘charity’ and ‘charitable purpose’,” he said.
The Community Council of Australia says it’s not surprising that the new Definition of Charity legislation has been delayed along with consideration of changes to Fringe Benefit Tax and other tax concessions.
“Any new government reform requiring significant consultation was always going to be difficult to manage this late into the election cycle. The challenge for the current Government is not so much driving more reform, but consolidating changes and selling the benefits of the significant reforms they have already committed to,” CCA CEO, David Crosbie said.
“This is not an easy task given an electorate that seems to have developed a tin ear for political messaging.
“CCA believes that there is now real scope to drive the Not for Profit reform agenda as part of the election agenda, but clearly, there is a very limited appetite for new reforms in what remains of this term of government,” he said.
In April the Federal Government released the long awaited exposure draft legislation for a statutory definition of ‘charity’ in Australia preserving the common law definition of charity, including the presumption of public benefit for certain charitable purposes.
It also incorporates recent court decisions, such as Aid/Watch Incorporated v Federal Commissioner of Taxation, which extended the circumstances in which a charity may advance public debate.

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BUDGET 2013 | WINNERS AND LOSERS

Australian Financial Review, 14 May 2013

Winners and losers from Treasurer Wayne Swan’s sixth budget.
Winners

  • School kids: Gonski education reforms funded for six years, including $2.9 billion in the budget over four years
  • People with disabilities: Disability insurance funded for seven years with $1.9 billion in the budget
  • Commuters: $24 billion road and rail infrastructure program to begin
  • Students and employees: Education, skills and research funding of $1.2 billion
  • Disadvantaged: New welfare and health spending of $1.8 billion
  • Retirees: Scheme to help elderly people move from family homes without suffering a pension loss
  • Farmers: $100 million farm household allowance and additional financial relief to offset the impact of the drought
  • Forests: $330 million to support the Tasmanian forest agreement
  • ATO: Tax Office gets $150 million in new funding
  • Savers: Rise in annual contributions caps for people over 50

Losers

  • Business: Tax hit for companies to raise $4.2 billion over four years
  • Multinationals: Profit shifting curtailed, debt deductions restrained
  • Miners: Exploration deductions curbed
  • Investors: Double-dipping on franking credits denied
  • Banks: Offshore vehicles slugged to raise $320 million
  • Super funds and trusts: Must pay monthly tax bills, adding $1.4 billion
  • Importers: New import processing charge
  • Innovators: R&D savings to raise $3.1 billion
  • Parents: Baby bonus abolished, saving $1 billion over four years
  • Middle to higher income earners: Health spending and tax savings to raise $1.7 billion; Medicare levy increase to fund disability spending
  • Renewables: Cuts to carbon programs including renewable energy and coal projects worth $3.4 billion
  • Foreign aid: Millennium development goals deferred another year

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WELFARE AND FOREIGN AID BUDGET LOSERS

Pro Bono Australia News, 14 May 2013

International aid and welfare payments are expected to be the losers in today’s Federal Budget – the sixth budget by Treasurer, Wayne Swan.
International Aid agency Oxfam Australia says Prime Minister Julia Gillard has failed an important test in keeping her promise to increase support to the world’s poor.

The Federal Government has already revealed it plans to again delay an increase in overseas aid levels to 50 cents in $100 of national income while diverting further funds to pay for asylum seeker programs in Australia.
Oxfam Australia Chief Executive Dr Helen Szoke said the continued raid on the aid budget shows the government cannot be trusted to keep its word.
“This is the Prime Minister’s harshest punch yet in a series of blows to the world’s poor. The government’s latest broken promise on aid is a further cut to those who can least afford it.”
However, the Minister for Foreign Affairs Senator Bob Carr says the Gillard Government will increase Australia’s Official Development Assistance to a record $5.7 billion in 2013-14.
“While it is disappointing that the Millenium Goals have been pushed back, it simply reflects the reality that you can’t borrow money to spend on aid,” Senator Carr said.
“Australia remains committed to increasing its aid budget to 0.5 per cent of gross national income.”
Community welfare groups have also expressed deep disappointment that the Federal Government will not increase the Newstart Allowance payment in the Budget, despite growing community support.
“We welcome the news that the income free area will be increased to allow people on the $35 a day payment to keep more of the money that they earn. However, this will do nothing for the 4 out of five people on Newstart who cannot get into paid work and have no other earnings,” the CEO of the Australian Council of Social Service, Dr Cassandra Goldie said.
“Increasing the income free area is only one part of the package and does nothing to help the most disadvantaged groups. We must address the inadequate allowance payment rates that have been effectively frozen in time for the past 20 years.”
“Allowing people to earn a bit more alone does not respond to the damage that has been done to around $80,000 single parent families,” Terese Edwards from the National Council for Single Mothers and their Children said.
“The Government has ripped $700,000 million dollars out the pockets of needy sole parent families, and will give around $300 million back to a potential pool of around 800,000 people on Newstart. This is simply inadequate,” Edwards said.
Maree O’Halloran from the National Welfare Rights Network said that increasing the income free area to $100 per fortnight will assist many of the people who call our Centres across Australia who are struggling to find full-time work.
“The increase may also encourage more people on Newstart to take up casual shifts.”
“Lifting and indexing to the earnings thresholds, access to education support through the Pensioner Education Supplement and extending access to the valuable Pensioner Concession Card are important reforms. They could have been properly applauded if they had been accompanied by the much –needed increase to Newstart.”
“We urge the community, business, the ACTU and all members of the Federal Parliament to continue to support a much needed $50 per week increase to the single Newstart Allowance and improved payment indexation arrangements,” O’Halloran said.
The Treasurer is expected to announce the funding for the Royal Commission into Child Sexual Abuse to be more than $430million over 10 years.
Additional long term funding for the National Disability Insurance Scheme and Gonski Education program are also expected to be revealed.
UnitingCare Australia’s National Director, Lin Hatfield Dodds said that long term social priorities can be delivered in this year’s Federal Budget by redistributing existing revenue and scaling back wasteful tax concessions.
“The starting point for the 2013 Budget is that the economy is performing well, but is vulnerable to weak international conditions. While this context does not give the Government a lot of room to move, it highlights the importance of not wasting money on tax concessions that have little merit,” Hatfield Dodds said.
“Budgets are all about choices and priorities. There are opportunities to fund important programs by scaling back tax concessions that do nothing for everyday Australians.
“New spending on disability insurance and education reforms will help give every Australian a fair go. We need to make sure that funding and taxation decisions also support a fair go.”
Wayne Swan has said that infrastructure funding is at the heart of tonight’s budget – emphasising job creation and a longer term boost to productivity from better road, rail and freight facilities.
The Budget speech will be delivered in Federal Parliament at 7.30pm.

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BUDGET OUTCOMES FOR INDIGENOUS AUSSIES

JEREMY GEIA, NITV, 14 MAY 2013

NITV correspondent Jeremy Geia takes a look at how the federal budget announcements will affect those in Aboriginal and Torres Strait Islander communities.
It has been revealed that 340 remote Indigenous communities in five states will share $44.1 million for essential services such as power, water and sewerage.
That  work will start in July.

Indigenous education is also getting a boost.

A plan to send 7000 students to boarding school will be backed by a $10 million grant to the Australian Indigenous Education Foundation

The National Disability Insurance Scheme will get a massive $68 billion investment over the next 10 years.

This means Indigenous families will be able to access carers and outlay for specialised equipment like wheelchairs.

Overall education funding of around $26 billion is projected over the next decade. But the Greens and the Australian Education Union weren’t too happy about cuts to higher education.

Last year nearly $25 billion was invested in black programs spread across 86 initiatives.

That represents nearly 6 per cent of the national budget.
Mining Magnate Clive Palmer traveled in his private jet to give his assessment of the Federal government’s spending on Indigenous Australians.
He says the proposed budget initiatives do not adequately address the needs of Indigenous Australians.
“There are many areas that don’t have sewerage, don’t have water and basic services need to be provided because that goes toward Aboriginal health,” Mr Palmer says.

Last financial year the government was accused by some black leaders of robbing the states to pay for the Stronger Futures rollout in the Northern Territory.

Ahead of the federal budget, some Indigenous leaders say they fear we will see more penny pinching in an effort to close the funding , as opposed to, the life expectancy gap.
New Indigenous funding announcements made in federal budget:
Funding for Indigenous services will be boosted by $1.6 billion in the federal budget 2013.
- $127.5 million to extend employment programs
- $12 million for additional support for specialised Indigenous legal services
- $15 million over three years to continue funding for the National Congress, starting in 2014
- $6.2 million for upgrades to nine hostels in Queensland and the Northern Territory
- $1.3 million over two years for a developmental study of Indigenous children

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AT LAST, SOME ‘QUALITY CUTS’ BUT MORE REFORM IS VITAL

Alan Mitchell, Australian Financial Review, 14 May 2013

The budget is the best brought down by this government, but it should be seen as just a belated beginning to a process of rebuilding the federal government’s fiscal strength.
The budget projections are better than economists expected, thanks to the long-term savings now in place or proposed. But they are not good enough.
The Treasury, it must be said, has an almost inexhaustible capacity to turn the desperate urges of its political masters into halfway decent or even better budgets.
In this budget Treasury’s hand can be plainly seen in the emphasis on long-term savings – what Paul Keating might have called quality cuts.
It is a pity that it could not persuade this government to do more of them, and we can only hope that it has more luck with the next government. The projected return to a budget balance in 2015-16, with the cash surplus rising to just over 1 per cent of GDP by 2018-19, is built on a return to very moderate declines in the terms of trade.
That may be how it pans out, but there are considerable downside risks not just from the fragile global recovery but also from the expanding supply of minerals and energy resulting from the global mining investment boom.
The longer-term projected surpluses – which must become a feature of future budgets – are heroic by the standards of the Gillard government’s fiscal record, but they really are too small for the pressures and risks we know are attached to the fiscal outlook.
Abbott will face pressure to spend too
A point easily overlooked in the current debate is that these projections are based on current policy and therefore take no account of the inevitable pressures for new spending initiatives.
There is never a shortage of worthwhile things to do, like school reform and disability insurance. Nor unfortunately does there ever seem to be a shortage flashy, second-rate “nation-building” projects to tempt governments.
Julia Gillard is criticised for being a big spending Prime Minister. There is truth in that criticism, but it is also too easy.
The Gillard minority government has been under pressure to spend and, after a relatively brief period, so will an Abbott government.
As the Treasury says in what could have been a Red Book message for the next government, the key lesson of the recent global experience is that the fiscal position needs to be strengthened sufficiently in the good times to allow fiscal policy to support the economy in the bad times.
The Howard government’s determination to eliminate federal public debt seemed excessive, but it has stood Australia in good stead in the global financial crisis and the subsequent weak and risky recovery.
But John Howard, in his quest to create fiscal space, had the advantage of assets to sell and the Chinese boom. Tony Abbott almost certainly will have fewer advantages.
The return of the economy to near-trend nominal growth in the coming fiscal year – with employment accelerating in that period just in time to stop the unemployment rate breaching 6 per cent – could be described as good times.
We should be using them to build fiscal space that takes account of the relentless pressures on government to provide more and better public services.
For that we need more long-term savings from more thorough-going reform of Medicare, of welfare, defence and of all other major government programs where politics and the easy availability of revenue have compromised efficiency.
At the same time there is a mountain of tax reform, identified by the Henry review, that could make a big difference to the way governments manage in the next decade.
These challenges are more for the next government, and it may be thought unfair to judge the pre-election budget of a besieged minority government against them.
But unless this budget is measured against the medium-term pressures and risks confronting the economy and fiscal policy, there will be no pressure on whoever is in government to confront the issues.
It is just too easy to fritter away the fiscal advantage inherited from Howard. Too easy to assume that the good times will return and last.

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GOVERNMENT SCRAPS BABY BONUS IN DEFICIT BUDGET

Emma Griffiths, ABC News, 14 May 2013

Wayne Swan tells 7.30 the revenue writedown underpinning the budget was an unprecedented event in the nation’s economy.
The Federal Government has taken a swipe at so-called middle-class welfare by abolishing the baby bonus in a deficit budget that delivers almost no traditional election-year sweeteners.
Instead Treasurer Wayne Swan says there will be “targeted, sustainable” cuts to bring the budget back into the black in four years’ time.
“We haven’t approached this budget in relation to opinion polls. We’re in this for the long run – the long-run reforms,” he said.
The centrepiece of Mr Swan’s sixth budget is long-range funding for the Government’s signature multi-billion-dollar measures to introduce a national disability insurance scheme and the Gonski school education changes.
Mr Swan has announced cuts worth $43 billion over the forward estimates, saying Labor has made a “choice [to] chart a pathway to surplus through responsible savings”.
This year’s deficit stands at $19.4 billion and the budget will remain in the red, posting a slightly improved $18 billion deficit in 2013-14, followed by a $10.9 billion deficit in 2014-15.
Balance returns to the budget in 2015-16 with a small $800 million surplus, described by analysts as a “rounding error”.
It is not until the last of the four forward estimates years that the budget returns to real surplus territory – $6.6 billion in 2016-17.
“I couldn’t live with myself if I walked in here and said that in the face of the biggest revenue write-down virtually in history, that I was just going to ignore it because it was politically inconvenient, or that we were going to dog the task of actually stumping up the money for doing the school improvement program, or that we couldn’t really provide the peace of mind and stability that was provided for DisabilityCare Australia to be funded – I couldn’t live with myself,” Mr Swan said.
Key numbers
2012-13 $19.4 billion deficit
2013-14 $18 billion deficit forecast
2014-15 $10.9 billion deficit forecast
2015-16 $800 million surplus forecast
2016-17 $6.6 billion surplus forecast
Savings
The $5,000 baby bonus, introduced by the Howard government and widely criticised as “middle-class welfare”, will be axed from March 1, 2014 – saving the budget $1.1 billion over five years.
The Government has instead moved to increase family payments (Family Tax Benefit Schedule A) for eligible families when they have a new baby.
Abolishing the baby bonus is likely to trigger strong criticism from the Opposition because, according to Government modelling, it will leave about 28,000 stay-at-home mothers who do not qualify for family payments with no government support.
It was introduced by former treasurer Peter Costello, who announced it by saying that parents should have one baby for the mother, one for the father, and “one for the nation”.
The increased payments for FTB-A will be $2,000 for the first child and an additional $1,000 for subsequent children.
However, the eligibility requirements are much tighter than they have been for the baby bonus.
Currently the household income cut-out for FTB-A for a family with two children is about $112,000. A mother can earn up to $150,000 a year before losing access to the baby bonus.
The Government predicts about 161,000 families would have received the baby bonus in 2014-15, and now expects that under the new system, 113,000 families will qualify for the boost to the FTB-A, and 20,000 families will take up the alternative paid parental leave scheme.
Mr Swan says the baby bonus was “not sustainable over the long term”.
“Further reform in this area was imperative. We understand there will be some people who will be unhappy about this decision,” he said.
Other changes to family payments, including ensuring that families on FTB-A only receive the payment until their child finishes school, will save the budget around another $1.5 billion.
The Medicare safety net will also be increased, from $1,200 to $2,000 from January 1, 2015 – a measure that will save the budget $105.6 million over four years.
The Government is also going to phase out the net medical expenses tax offset to help pay for the NDIS, saving almost $1 billion over the forward estimates.
But, in line with much of Mr Swan’s political rhetoric, many of the budget savings target the big end of town with changes to corporate tax arrangements.
A figure of $1.1 billion will be saved by lowering the cap on the tax incentive for research and development, opening it only to companies with annual revenue of $20 billion or less.
The Government is hoping to save $3.1 billion over four years by tightening corporate tax loopholes that currently allow large transnational companies to shift debts and profits among their subsidiaries to minimise the amount of tax they pay.
Another measure reduces the amount of exploration tax deductions mining companies can claim upfront, for a saving of $1.1 billion over the forward estimates.
“We have always put the interests of working Australians first,” Mr Swan said.
“In this budget, we do so again.”
The price of a packet of cigarettes will also rise by 7 cents next March, after the Government changed the indexation arrangements, switching the link from the Consumer Price Index to average weekly earnings.
The Government is also cutting funding to the Carbon Capture and Storage Flagships by $500 million over three years, as well as deferring $370 million earmarked for the Renewable Energy Agency. It’s also cutting about $270 million from a program designed to support coal mining jobs.
The Government has also increased the charge for 457 Temporary Work visas.
From this July, the cost of a visa will increase to $900, raising nearly $200 million over four years.
The Government has targeted the 457 visa program in recent months, saying it has concerns the system is being “rorted”.
Spending
Mr Swan says any new spending has been offset by savings measures but he insists there has been no savage austerity in drawing up this budget.
Funding a national disability insurance scheme is a major feature of the budget, with the Government committing $19.3 billion over seven years from 2012-13 for the national roll-out of DisabilityCare. As previously announced, the Medicare levy will be increased by 0.5 of a percentage point from next July, a measure that has been supported by the Opposition.
The tax rise will only partly fund the scheme, providing approximately $20.4 billion between 2014-15 and 2018-19, when the NDIS will be fully operational.
Mr Swan says the NDIS means “there is something in this [budget] for the whole of Australia”.
The Gonski school education plan is the other main package, worth $9.8 billion over six years from next year.
“I do reject the notion that there is nothing big in this budget,” the Treasurer said.
He said the measures mark a “huge change for Australia”.
There is also new spending of about $3 billion on infrastructure projects which also have private funding at their core. The next phase of the Government’s “Nation Building Program” will focus on the F3 to M2 “missing link” in Sydney, the Melbourne Metro and the Brisbane Cross River Rail.
The Government has also announced a boost of about $250 million to fund more university places and research infrastructure, but that will do little to appease the tertiary education sector, which is still bruised over the $2.3 billion cut announced last month to help fund the Gonski plan.
Cost blowouts
While there’s a yawning hole in revenue, there have also been multi-billion-dollar blowouts in government programs – the largest of which has been managing the cost of the surging number of asylum seekers arriving by boat.
The price tag will be an extra $1.3 billion next financial year, with a projected cost of $3.2 billion over the four years to 2015-16.
The cost of development assistance associated with asylum seekers is also expected to be $431 million higher in 2013-14, with a total four-year cost of nearly $1 billion.
The Government has said the current arrival rate is “not acceptable in terms of the risks to human life, or the impact on the budget”.
It has announced a review into the refugee status determination process to look for changes to improve the “efficacy” of the system and to ensure that “acceptance outcomes” for asylum seeker claims are consistent with other countries.
Reflecting the ongoing growth in health costs, the other most significant blow-outs include an extra $2.2 billion over four years for private health insurance payments and $2.1 billion over four years for larger than expected payments through the Medicare Benefits Schedule.
Family payments are also expected to cost an additional $1 billion to 2015-16.
Revenue write-downs
The Government has blamed much of the budget woes on massive revenue write-downs of $17 billion this financial year. Since the mid-year economic review in October, the total revenue write-down has been forecast at $60 billion over the next four years.
“This year we face the second largest revenue write-down since the Great Depression,” Mr Swan said in his budget speech.
Contributing to the write-down is a dramatic cut in the forecast price of carbon, with Treasury more than halving it from $29 per tonne to $12 per tonne. That has been triggered by the collapse in the carbon price in Europe, which the Australian scheme will link to from 2015.
The budget has yet again slashed the revenue forecasts for the mining tax.
Treasury is expecting the tax to raise just $200 million this financial year, a fraction of the $3 billion estimate that was pitched only 12 months ago.
Over the first four years of the tax, Treasury’s forecast has plunged from $13.4 to just $3.3 billion.
Mr Swan says net debt will peak at 11.4 per cent of GDP in 2014-15 and he projects it will fall to zero by 2022.
Treasury is forecasting lower growth next year at 2.75 per cent, followed by a 3 per cent rate beyond that.
It expects a steady jobless rate of 5.75 per cent for the next two years.

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BUDGET INCLUDES FRESH CRACKDOWN ON MIDDLE CLASS WELFARE

Michelle Grattan, Sunshine Coast Daily, 14 May 2013

TREASURER Wayne Swan has delivered a budget with a A$19.4 billion deficit this financial year, falling only to $18 billion in 2013-14.
The government would aim to bring the budget back to “balance” – less than $1 billion in the black ¬- in 2015-16, and have a modest $6.6 billion surplus in 2016-17.
The government’s unconventional pre-election budget – which includes a rise in the Medicare levy and a fresh crack down on “middle class welfare” – contains $43 billion of savings through the forward estimates and funding for the key schools and disability programs.
It foreshadows a growing economy but a small rise in unemployment, to 5.75%, next financial year.
Swan said the government had chosen to support “jobs and growth in an uncertain world,” rather than cutting to the bone.
He said the budget would “chart a pathway to surplus through responsible savings.”
“To those who would take us down the European road of savage austerity, I say the social destruction that comes from cutting too much, too hard, too fast is not the Australian way,” he told parliament.
The government will scrap the Baby Bonus from next year, while providing new support for the families of newborns through the Family Tax Benefit A.
In another tightening, the existing “pause” of the indexation of the family payments system for upper income test limits will continue. These measures are in addition to the earlier announced cancellation of increases to the Family Tax Benefit that were due in July.
The total changes to the family payments are worth nearly $5 billion over the budget period.
In other cuts, a number of business tax loopholes will be closed and several areas of health spending will be tightened.
The positive themes of the budget were putting in place the national disability scheme and the Gonski school funding plan, as well as heavily investing in nation-building infrastructure.
“This budget will fully fund our share of DisabilityCare Australia, beyond the next decade,” Swan said. An increase in the Medicare levy from July 1 next year will part fund the scheme.
Swan also said the budget fully funded the government’s schools program over the next decade, “meaning we can return the budget to surplus without leaving our children an education deficit.”
On infrastructure, he said the government would continue its ambitious program “with a new $24 billion investment in the next wave of nation building.
“It’s critical to invest in both urban road and rail infrastructure,” he said.
The government was investing in “transformational public transport projects”, including Brisbane’s Cross River Rail and Melbourne Metro. “These projects will change the way these cities work and allow them to grow into the future.”
The government also announced $12.9 million to connect more local councils to the NBN and provide training for business and not-for-profit organisations in 20 regional NBN rollout sites.
Nearly $100 million will go to a new farm household allowance to support farmers in hardship, part of the national drought program reform, and there will be a new farm finance package to help farmers struggling with debt.
The government has loaded the weight of the savings it has identified into the later years of the forward estimates.
Swan said that challenging global conditions and the high dollar had put “huge pressure on the budget, leading to a reduction in expected tax receipts in more than $60 billion over the four years to 2015-16.”
The budget forecasts growth for this financial year of 3%, falling to 2.75% in 2013-14 before rising to 3% in 2014-15.
“Our nation’s outlook is bright and our economy is set to grow faster than most of the developed world,” Swan said, “By mid-2015 our economy will be 22% bigger than before the global financial crisis, outstripping every major advanced economy.”
He said the economy was undergoing an important transition. “Our nation’s largest resource investment boom is shifting to a boom in production and exports… as the resources boom enters its new phase, the economy is also transitioning to broader sources of economic growth.”
This brought opportunities, but the transition would not be seamless. He said despite the slight rise in unemployment, Australia would still have among the lowest unemployment rate in the developed world.
The budget revised its earlier forecast of the carbon price dramatically down, to around $12 a tonne in 2015, when it moves to a floating system and is linked to the European price.
The budget says the second round of the tax cuts, which had been due in 2015, would be deferred until the carbon price was estimated to be about $25.40. This is currently projected to occur in 2018-19 it says.

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BUSINESS HIT WITH MASSIVE TAX CLAWBACK

John Kehoe and Katie Walsh, Australian Financial Review, 14 May 2013

Corporate Australia will be slugged an extra $4.2 billion over the next four years to “protect the corporate tax base”, as Labor seeks to squeeze more revenue from existing business taxes rather than introducing new imposts.
Multinational companies, miners and banks will be among the sectors the government will depend on to deliver the higher tax take, which Treasurer Wayne Swan said closed loopholes and stopped big businesses gaining an unfair advantage.
Business groups criticised the changes and claimed they were a revenue grab that would deter investment.
The biggest revenue raiser will be a $1.5 billion crackdown on shifting profits to lower tax jurisdictions, in a move likely to affect highly geared businesses, including in infrastructure, resources and private equity.
The government will target multi¬nationals allocating large amounts of debt to their Australian arms and claiming big tax deductions, by tightening the integrity of the international tax laws from July 2014.
The measures are domestic, but are in line with global efforts by the G20 and OECD to clamp down on profit shifting at a time when government budgets around the world are under pressure.
The revenue raising measures on big business come after last year’s budget failed to deliver the forecast $11 billion or 20 per cent rise in company tax, due to overoptimistic forecasts and a high Australian dollar. As part of a suite of measures affecting big business, resource exploration companies will forfeit $1.1 billion in tax concessions, as the government seeks to offset weak revenue from its mineral resources rent tax.
The government said it was ¬concerned some miners were claiming immediate multimillion-dollar exploration deductions for activities after natural resources were discovered.
The mining tax will raise only about $200 million this financial year, well short of the already watered down $2 billion forecast in the mid-year budget update in October.
Over the five years to 2016-17, the iron ore and coal tax is projected to raise $5.5 billion, less than half of the ¬previous forecast.
“We are closing loopholes and ¬protecting the corporate tax base to ensure multinationals and big businesses are not being given an unfair advantage,” Mr Swan said in his budget speech on Tuesday night.
Separately, during parliamentary question time on Tuesday, the opposition claimed it had information that Assistant Treasurer David Bradbury had briefed people in the market ahead of the announcement of the planned changes to thin capitalisation laws.
Mr Bradbury said he had been ¬consulting the industry but was confident no one had gained an unfair advantage and the changes didn’t take effect until July 2014 anyway.Industry reaction video
Banks will be restricted from using low-tax offshore entities to reduce their tax bills under a measure estimated to yield the government an extra $320 million over the next four years.
The offshoring banking unit regime introduced by former treasurer Paul Keating in 1986 to help banks attract non-resident business, will be restricted because of concerns banks were using the low tax vehicles for their domestic operations.
A tightening of tax laws for large ¬consolidated groups to prevent them attaining tax benefits from artificial intra-group transactions will raise an estimated $540 million over the next four years. The use of offshore marketing hubs and dividend washing by sophisticated investors double dipping on franking credits will also be ¬curtailed under the banner of “protecting the corporate tax base”.
Despite the hits to big business, revenue as a share of the economy will remain relatively subdued at 23.5 per cent of GDP in 2013-14 before slowly rising to just above 24 per cent in future years. Company tax is forecast to gradually recover from $66 billion this year, to $71.6 billion in 2013-14 and $82.8 billion by 2016-17.
The government will consult on the changes, which Mr Bradbury said were wide-ranging and comprehensive.
“Every single one of these goes to profit shifting and base erosion – concessions built into the system have been abused,” Mr Bradbury told The Australian Financial Review. “Most Australians would agree we need to do something.”
The OECD is due to report to the G20 on profit shifting when it meets in July.

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CORNERED LABOR CHOOSES BRAVE WAY OUT

Ross Gittins, The Sydney Morning Herald, 14 May 2013

This is the weirdest budget you or I are ever likely to see. That doesn’t make it bad – just very strange.
With just four months until the election, it’s the most unlikely pre-election budget you could imagine, with loads of nasties and next to no sweeteners. It is  more like a post-election budget, particularly the kind you get after a change of government.
But its strangeness doesn’t end there. The Parliament has so few weeks left to sit, it is likely most of its controversial measures won’t become law before the election (with the increase in the Medicare levy the main exception).
That makes it less a budget than an election policy speech. Only if Julia Gillard is re-elected can we be sure the budget measures will become a reality.
And since the chances of Labor’s re-election seem low, this is more Tony Abbott’s budget than Gillard’s. It will be he who decides which measures survive and which don’t; whether Labor’s last budget becomes anything more than its final, impotent gesture.
Do you think Gillard doesn’t know that? This is the budget of a government that knows it’s a dead duck.
Usually when governments know they are going to lose, they  go for broke, offering electoral bribes they know they will never have to find a way to pay for, aiming to minimise their loss of seats.
Not this time. This budget is more likely to cost Labor votes than win it any.
No, the purpose of this budget is not vote-buying – it is reputation-rescuing, a last-ditch attempt to influence what history will say about the Rudd-Gillard government  as an economic manager.
History will be impressed by this budget – and a lot more forgiving of Labor’s shortcomings than voters are likely to be on September 14.
At this time in 2010, Wayne Swan seized on a Treasury projection three years into the future and boasted about his feat of returning the budget to surplus in 2012-13.
In the following election campaign, Gillard foolishly turned that long-range projection into a solemn promise.
This time last year, Swan boasted of budgeting for four surpluses in a row, as though they were in the bag. His surplus of $1.5 billion for the financial year just ending is now expected to be a deficit of $19.4 billion (but even that isn’t yet certain). This year his boast of being able to get the budget back to a surplus of $6.6 billion in 2016-17 (again on the basis of Treasury’s long-range projections) will draw understandable cynicism.
But just as Swan and Gillard should have more sense than  to attach much weight to economists’ forecasts, so should the rest of us. Treasury’s crystal ball will be no more reliable after a change of government. Less initial naivety on the part of the media and the public would reduce ultimate cynicism.
The strength of this budget – should it come to pass –  is that Swan has found sufficient saving measures (90 per cent of them tax increases) to cover the cost of the painfully slow phase-in of the disability insurance scheme, the Gonski school funding reforms and other new spending measures.
He has  found other savings to make a start on reducing the budget’s significant ”structural” deficit – the product of excessive generosity by successive governments – and eventually getting the budget back to surplus, but without endangering the economy’s tricky transition from mining-driven to consumer and business investment-driven growth over the coming year.
These additional, structural deficit reductions build from nothing in the coming financial year to $6billion in the following year and $12billion in each of the next two years. Being saving measures, these figures are less dependent on predictions about the state of the economy and so are easier to believe.
By my rough figuring, they will eventually reduce the structural deficit – that is, claw back unfunded handouts – by about 60 per cent.
It has to be said, however, that few of the nasties in the budget  will cause  voters to lose much sleep. They are aimed mainly at the well-off and foreign multinationals.
Even so, for a government that’s been far too timid in tackling unjustified spending programs and tax breaks, this budget is surprisingly brave.
And if, by being the one to propose last night’s unpopular measures, Gillard makes it easier for Abbott toagree to them now or to introduce them after the election, Labor willdeserve respect for initiating such a heavily disguised form of bipartisanship.
For what it’s worth, this is a good budget. But that is the trouble: under these strange circumstances, it ain’t worth a lot.
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ECONOMIC MALPRACTICE: TIME FOR A MORAL CRUSADE AGAINST TAX SCAMS

Editorial, The Observer, 12 May 2013

Tax is a collective obligation to build a decent society. Too many companies are avoiding their civic responsibilities.
Africa is on the crest of a global commodities boom. Mozambique and Tanzania are emerging as major exporters of natural gas; Guinea and Sierra Leone have iron ore; while in the Democratic Republic of the Congo, cobalt mining is booming. Strong demand will drive another decade of high prices for Africa’s natural resources. Foreign investment is on the rise. But so too are avarice and corruption, on such a scale that instead of enjoying significant investment in healthcare, education and agriculture, Africa is again being plundered.
That is the view of the annual Africa Progress Report, published last week, produced by a panel of luminaries led by the former UN secretary-general Kofi Annan. Large-scale tax avoidance and evasion, financial transfers, offshore registered companies and secret mining deals cost Africa £25bn a year, twice as much as it receives in aid. “These are global problems that demand multilateral solutions,” Annan said last week.
The G7 leaders’ meeting in Britain yesterday voiced their determination to combat tax avoidance. David Cameron has made tax and transparency key subjects for next month’s G8 meeting at Lough Erne, Northern Ireland. George Osborne yesterday emphasised how central the issue is to government strategy and, as we report, will pursue his tax-reforming strategy at a meeting of EU finance ministers later this week. This is admirable, but a glimpse at the Africa Progress Report shows how much work there is to do. And not just in tightening up international legislation, but also in effecting a cultural change in the way the leading firms conduct their business.
The scale of greed, the absence of conscience and the stupidity of not investing in the creation of stable future markets in Africa are laid bare in the report. Take the example of the Eurasian Natural Resources Corporation (ENRC) in the Democratic Republic of Congo (DRC). The FTSE 100 mining company is heavily criticised for “opaque concession trading”. Five mining stakes bought by the company in 2010-2012 were state assets allegedly sold at far less than their true value. The cost in lost revenues to the DRC is calculated at $1.3bn – equivalent to its health and education budgets combined. Multiple offshore vehicles were deployed to conceal the secretive deals, precisely the sort of lack of transparency that the G8 is committed to tackling.
The Annan report also highlights how, in the four years to 2009, half-a-million copper mine workers in Zambia paid a higher rate of tax than the major multinational mining firms that were harvesting billions of dollars in profits. How can this be right? And why has such behaviour become acceptable?
The examples are everywhere. In 2011, Google paid just £6m in corporation tax on revenues of £2.5bn in the UK. Its chairman rightly said that they “comply with the law”. The problem is that our law has not found a way of adequately taxing companies such as Google. In the meantime, such firms use every conceivable mechanism to avoid paying tax. They then offer a risible justification, such as Schmidt did when he said that Google employs 2,000 people in Britain.
Not good enough. Google employs people – try making money without doing that — and makes billions in the process, but puts practically nothing back into the country from which it harvests £2.5bn annually. Nothing to help finance the education of the next 2,000 employees from this country. Nothing to help maintain the physical infrastructure of a country where it does business. Nothing to help subsidise the cultural riches that make this country an attractive place to live and work. Nothing to help pay for the judicial, legal and police institutions that make the country a safe and civil place to do business.
We as a society – and that includes business behemoths such as Google – have responsibilities to deal fairly with communities with whom we trade. The pioneers of benevolent capitalism recognised their obligations to help build a decent society from which they profited.
But Google is not alone. Last week, it was announced that more than half of Britain’s wealthiest people were hiding billions of pounds in offshore havens to evade tax, helped by 200 accountants and advisers. Tax evasion is illegal but tax avoidance, finding legitimate loopholes to avoid paying a fair tithe as a citizen, is rampant. Last year, a Tax Justice Network (TJN) report revealed that the global super-rich have hidden £13tn of wealth offshore.
Illumination about the true state of the UK’s financial affairs has been helped by the work of the public accounts committee, chaired by Margaret Hodge, an invaluable fiscal watchdog. Last month, it castigated the four large accountancy firms, Deloitte, Ernst and Young, KPMG and PwC, which earned $25bn from advising on tax avoidance.
In the 1960s, accountants deemed avoidance an undignified practice, acknowledging that tax is a collective obligation to build a decent society. Now it is a lucrative business – finding new ways to short-change the chancellor and rip off developing countries. Amazon in the US lobbied effectively for 20 years to avoid paying the sales tax levied on “bricks and mortar” retailers it competes with and increasingly puts out of business. Jacob Weisberg, writing in the Financial Times, pointed out that we have “a political system so compromised and sclerotic that it cannot correct even the most straightforward economic unfairness in a timely fashion”. The average taxpayer can only rage. But what is to be done?
Globally, changes are under way. From July, for instance, in Singapore, laundering profits earned from tax evasion will be a crime, while Luxembourg ends its bank secrecy policy in 2105. More is required. The international tax system is a century old and needs radical redesign, not repair. TJN proposes a unitary tax system of transnational corporations, “to tax them according to where their genuine economic activity is, rather than where their tax advisers pretend it is”. The US Dodd-Frank Act that requires full disclosure of payments by resource-extraction companies to foreign governments needs to be built on – and comparable EU legislation is required.
At home, HMRC requires more, not fewer, resources. Serious questions too need to be asked of George Osborne’s decisions at the last budget that appear to make it even easier for companies to shift their profit into tax haven subsidiaries. Tax havens should end.
Political will, co-ordinated international action, more public education and tax systems that work for all might give Africa a fresh beginning. We also need to create a new moral consensus that says those companies and individuals who pocket obscene amounts of wealth without paying their civic dues should be denied our custom and treated instead as the freeloading pariahs they are.

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BUDGET TO CRACK DOWN ON MULTINATIONALS USING TAX LOOPHOLES

Phillip Coorey, The Australian Financial Review, 11 May 2013

Multinational companies that funnel international investments through Australia to wipe out their domestic tax liabilities will be one of the targets in Tuesday’s federal budget, which is believed to contain multiple measures cracking down on international corporate tax avoidance.
The budget will combat the practice known as “debt dumping” in which companies load up their Australian operations with debt, enabling them to claim large tax deductions, in some cases worth billions of dollars.
The loophole is one of many that will be closed on Tuesday. Other measures will include forcing foreign investors to pay capital gains tax on Australian property sales, a tightening of thin capitalisation tax breaks to make it harder for companies to shift profits to countries with lower taxes, and targeting profit shifting by multinationals such as Google.
Debt dumping is a complicated exploitation of loopholes in existing tax law, described by one multinational’s Melbourne-based tax adviser as “the new magic’’.
As an example, a parent company in Europe buys a target company in North America. The parent company then lends money to its Australian company which then “buys’’ the target company from the parent company.
The Australian company receives tax-free dividends from the target company and then claims massive tax deductions on its interest payments.
Ultimately, the Australian company all but eliminates its tax bill on its profitable Australian operations.
Assistant Treasurer deplores multinationals’ tax loopholes
The practice was referred to in a court case last year in which the Australian Tax Office pursued US multinational parent company Noza Holdings. The company’s tax adviser has described in an email the use of redeemable preference shares as “the new magic’’.
The Federal Court ruled that Noza, which operated about 600 businesses in 40 countries mainly concerning the manufacture and sale of consumer and industrial products, was entitled to a $171 million tax deduction for 2003.
Treasurer Wayne Swan and Assistant Treasurer David Bradbury have become increasingly vocal about tax avoidance loopholes being used by multinationals. In March, Mr Bradbury gave a speech entitled “Stateless Income, a Threat to National Sovereignty”, in which he cited the Noza case and emails between the Melbourne tax adviser and executives in Chicago.
“The point of recounting this case is not to single out this particular taxpayer or their advisers, but rather to illustrate the flexibility that a multinational group has in arranging their capital structure, and the ability this provides to exploit tax arbitrage opportunities,’’ Mr Bradbury told the Tax Institute.
“Of course, from a tax adviser’s perspective, many of you will say that there is nothing wrong with that, they are just doing their job of minimising their client’s tax according to the law. To be clear, I am making a fundamentally different point. If this is the kind of behaviour the international tax system encourages then it needs to be changed.’’
Mr Swan raised the matter at the G20.
Another $22 million for indigenous education
The government will argue in the budget that objective analysis of debt dumping “suggests that there are no commercial reasons to funnel these investments through Australia other than to claim massive deductions and aggressively minimise tax”.
“These practices effectively strip profits out of Australia and erode the revenue base.’’
The measures will complement moves taken to strengthen tax rules and protect at least $10 billion in revenue.
In an unrelated measure, the government will boost by $22 million funding to the Australian Indigenous Education Foundation. The foundation is headed by Andrew Penfold, a former finance lawyer and investment banker.
Recently, Opposition Leader Tony Abbott’s policy adviser, Mark Roberts, was demoted after he threatened Mr Penfold, saying an Abbott government would “cut the throat” of funding to Mr Penfold’s organisation.

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SCORES OF RICH AUSTRALIANS DODGING TAXES, ATO SAYS

Ben Butler, The Sydney Morning Herald, 10 May 2013

More than 100 wealthy Australians, some of them high-profile, have netted tens of millions of dollars in ill-gotten gains through newly discovered links to a worldwide network of tax havens, the Tax Office claims.
ATO deputy commissioner of serious non-compliance Greg Williams said two Australians were under criminal investigation, while 65 others had been identified as ”high risk” because they had each moved more than $1 million in or out of Australia without declaring the money in their tax returns.
The swoop is based on a database – obtained through the ATO’s international information exchange network – of more than 2 million documents that show how thousands of people around the world use shell companies and trusts in tax havens Singapore, the British Virgin Islands, the Cayman Islands and the Cook Islands.
Mr Williams said he expected the number of Australians caught up in the probe to grow as the ATO swaps intelligence with its US and British counterparts.
”The message I’ve been putting out in recent times is that you think you can be clever and hide and that you are invisible in this particular system because you’re dealing in some kind of offshore arrangement,” Mr Williams said.
”The reality is that we are starting to see this and we can see you.”
After sifting through the data, the ATO is investigating a company in Sydney that has claimed millions of dollars in tax deductions for interest expenses on offshore borrowings. The ATO claims the loans are a sham because the offshore lender is actually controlled by the Australian company.
It has also launched an audit of a Melbourne man who claimed more than $25 million in share deals were carried out for offshore clients. The ATO believes the man was the real owner of the shares.
The ATO’s database appears to be the same as one held by former Fairfax Media journalist Gerard Ryle’s International Consortium of Investigative Journalists, which has published a series of reports linking secret offshore structures to individuals including a member of the Philippines Marcos dynasty, the Deputy Speaker of the Mongolian parliament and Brigitte Bardot’s former playboy husband.
It is believed the data is a complex mix of spreadsheets, emails and other documents that required sophisticated software to analyse.
”It’s our ability to then link that with Austrac [the government agency that tracks international money flows] data that really paints a full picture,” ATO assistant commissioner for economic crime Paul Cheetham said.
Mr Williams declined to detail how the ATO gained access to the database but said it was obtained within the past 18 months and did not come from the ICIJ.
The ATO also has access to thousands of client records stolen by a former employee of Liechtenstein Group Trust, the wealth management arm of the European tax haven’s royal family.
On Tuesday, Fairfax Media revealed that 70 Australians with income of more than $1 million a year paid no tax in the 2010-11 financial year.

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COUNTRY-BY-COUNTRY REPORTING COULD HELP STOP THE PLUNDER OF AFRICA

Tax Research UK, 10 May 2013

Kofi Annan has a pre-G8 op-ed in the New York Times this morning. In it he says:
This is an area in which the G-8 can make a real difference. The summit should serve as a launch-pad for the development of a rules-based global system on transparency and taxation.
It is time to draw back the veil of secrecy behind which too many companies operate. Every tax jurisdiction should be required to publicly disclose the full beneficial ownership structure of registered companies. Switzerland, Britain and the United States — all major conduits for offshore finance — should signal intent to clamp down on illicit financial flows. And the G-8 and the G-20 should work together to expand the scope and reach of the Dodd-Frank legislation.
The last is, of course, code for country-by-country reporting.
The time has come.
As has come the time for tax haven reform.
We know what is needed now. It has to be delivered.

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AUSTRALIA JOINS US, UK IN TAX HAVEN PROBE

Georgia Wilkins, The Sydney Morning Herald, 10 May 2013

An investigation into the tax avoidance schemes of hundreds of wealthy Australians is part of a multinational inquiry into offshore data believed to include 2.5 million leaked tax records.
The Australian Tax Office’s probe, which has so far put two Australians under criminal investigation, will work in tandem with those announced by US and UK governments overnight.
All three inquiries are believed to be based on secret records given to the International Consortium of Investigative Journalists during an investigation into a global network of tax havens last month.
The ICIJ claims the documents represent one of the largest stockpiles of inside information about the offshore system, and include the names of thousands of American, Australian and British citizens.
The US Internal Revenue Service said in a statement late on Thursday that the three nations ‘‘have each acquired a substantial amount of data revealing extensive use of such entities organized in a number of jurisdictions including Singapore, the British Virgin Islands, Cayman Islands and the Cook Islands.’’
“This is part of a wider effort by the IRS and other tax administrations to pursue international tax evasion,” IRS Acting Commissioner Steven T. Miller said.
“Our cooperative work with the United Kingdom and Australia reflects a bigger goal of leaving no safe haven for people trying to illegally evade taxes.”
British tax authorities also confirmed on Thursday that they were working with Australian and US administrations to examine the extensive use of complex offshore structures that concealed the assets of wealthy individuals and companies.
‘‘The 400 gigabytes of data is still being analysed but early results show the use of companies and trusts in a number of territories around the world including Singapore, the British Virgin Islands, the Cayman Islands, and the Cook Islands,’’ a statement from the British tax office said.
‘‘The data also exposes information that may be shared with other tax administrations as part of the global fight against tax evasion.’’
More than 100 wealthy Australians, some of them high-profile, have netted tens of millions of dollars by setting up shell companies or trusts in havens such as Singapore and the Cayman Islands to avoid paying tax, the Tax Office said on Thursday.
ATO deputy commissioner of serious non-compliance Greg Williams said two Australians were under criminal investigation, while 65 others had been identified as ”high risk” because they had each moved more than $1 million in or out of Australia without declaring the money in their tax returns.

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HOW DOES THE TREASURER DRAW UP THE BUDGET? A CRIKEY GUIDE

Stephen Bartos, Crikey, 9 May 2013

Lobby groups hoping for a last-minute push for their pet projects in next week’s budget are out of luck — it’s been mostly done for months. Governance expert Stephen Bartos explains the painstaking process.
The budget next Tuesday will be a miracle of co-ordination of the efforts of hundreds of people and thousands of competing priorities. But how does a budget come together?
Australia’s budget starts from the basis of forward estimates. These are the estimates prepared by the departments of Treasury and Finance of what revenue and spending will be in the coming budget year and the three years after (the “forward” years) if the government made no policy decisions. This means the government takes every decision knowing what it will do to spending or taxes over the next four years. The forward estimates system has been in place since the 1980s. We take it for granted; the rest of the world sees it as best practice.
The forward estimates are so robust that if a government decided to holiday in the tropics instead of working on the budget, the forward estimates from last year would become the next year’s budget. However — and here is the source of the government’s current budget troubles — Treasury and Finance adjust those estimates during the course of year to take account of actual spending and revenue trends and movements in the Australian and world economy. This is a good and necessary step to render the estimates more realistic.
Revisions to the revenue forecasts have made the government’s budget task much harder. During the early 2000s, Treasury forecasts consistently underestimated revenue so the final result was better than planned. In the last five years the estimates have been consistently wrong the other way, and each update shows lower revenue than forecast.
This is not because Treasury hates Labor. It is because the revenue estimates understate trends both ways — when economic conditions are improving and when they are worsening. There is a huge difference between a pre- and post-global financial crisis world, which accounts for the different experience with the revenue estimates.
Compounding the difficulty, revenue has become more volatile. Income taxes are relatively stable, whereas company profits (the basis of company tax) swing around with the economic cycle. Reductions in income tax put in place at the height of the mining boom have made budget revenue forecasts inherently more uncertain. Other taxes, such as company tax, capital gains tax and the GST, move with the economy. (The GST estimates don’t so much affect the federal government budget bottom line — GST revenue is passed directly to the states — but do worry state treasurers.)
The 2012 review of Treasury’s Forecasting Methodology and Performance was set up to “assess the quality of Treasury’s forecasts of the macroeconomy and revenue by examining the appropriateness of forecasting methodologies and comparing forecast accuracy with other forecasters”. It recommended “Treasury should include in the Budget papers a high level review of the economic forecast errors (nominal and real GDP) for the previous financial year”. So we may, with any luck, see some discussion of the problem in the budget.
“The beauty of Australia’s budget, however, is the quality and depth of the documentation. All the decisions are there for people to see.”
The revision does not matter much to the economy. Within a $1.5 trillion Australian economy and a Commonwealth government revenue estimate of $403 billion at the time of the mid-year economic outlook, a $20 billion writedown (which is being talked about for next week) is small. Revenue is not falling in total. It is still growing, just not as fast as previously anticipated.
Politically, though, the writedown makes a hell of a difference. In any one year government decisions would rarely change more than around 5% of revenue or spending. All budgeting is at the margins. So the government is faced with an estimates variation that suddenly takes away all its discretionary room for decision-making.
The budget is a culmination of months of effort by not only ministers but literally hundreds of bureaucrats and advisers. In the lead-up to the budget, cabinet’s expenditure review committee will have been assessing a multitude of bids from other ministers for more spending in their portfolios. They will have been asking ministers to suggest offsetting savings. In a tough year, an ERC will sometimes take the offsets but deny the new spending bid, leaving a frustrated minister gnashing his or her teeth in the corridor.
Lobby groups that propose spending or saving in the weeks before the budget have missed the bus — the decisions were mostly made months ago. Yet in every budget there is last-minute tweaking by the treasurer and prime minister, to the frustration of Treasury and Finance officials. A full update of the estimates takes days, and the budget papers have to be printed. One day there will be a budget when last-minute changes push the system over the edge and the updates just can’t be processed in time. Treasurer Wayne Swan will be hoping it is not Tuesday’s.
The budget ritual of leaking of bad news to condition opinion in the weeks before the budget has been in full swing. It’s a blatantly transparent ploy, used by all modern governments, but most of the media goes along with it because it fills the airwaves and electrons.
Budgets are not primarily economic documents but political ones. The decisions on spending or saving signal the government’s priorities for the future. A budget can set in train spending programs or tax changes that may not have an immediate impact, but cast a very long shadow. They are the annual priority event for any government.
Every budget has a heap of spin applied, with glossy documents showing the government’s decisions in the best light. The beauty of Australia’s budget, however, is the quality and depth of the documentation. All the decisions are there for people to see. One of the very best features of the budget papers is the “reconciliation” table, with separate lines showing the impact on the forward estimates of parameter changes (the technical adjustments made by Treasury and Finance) and government policy. It shows us how much the government has actually changed things, and how much was out of its control. If there is one nerdy table of figures to look at, it is this one.

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RESOURCE TAX UNDERMINED BY BILLIONS IN CREDITS

Michael Janda, ABC News, 9 May 2013

The Federal Government’s mining tax raised only $126 million in its first six months and it is generous asset deductions, not falling commodity prices, that seem most to blame.
The $126 million the Minerals Resource Rent Tax (MRRT) raised in its first six months was way off the Treasury forecast of $2 billion, which itself was downwardly revised from an earlier forecast of $3 billion.
When announcing the revenue figure in February, the Treasurer Wayne Swan blamed slumping commodity prices.
“The huge drop in commodity prices in the second half of last year had a dramatic impact on MRRT revenues,” he told reporters.
Indeed, the benchmark Chinese spot iron ore price did slump from $US133.50 per tonne on the first trading day after the MRRT took effect to $US86.70 just two months later.
However, it was back up to $US144.90 by the last day of that six-month period, and spent only seven weeks below $US110 per tonne.
Most of the $126 million in revenue, according to the Tax Office, was raised in the second three-month period where prices were never below $US100 per tonne.
Those figures indicate falling commodity prices are only part of the story as to why the mining tax revenues missed forecasts so badly.
The other reason is revealed in the financial reports of the miners themselves.
Billions in tax credits
The mining tax allows companies to offset the value of their mines against the tax they have to pay, and the 2012 financial reports of BHP Billiton and Rio Tinto show that amounted to tax credits worth $644 million and more than $1.1 billion respectively.
They believe over the next few years they’re not likely to pay any tax under that legislation.
Hancock Prospecting’s freshly lodged 2012 financial report – submitted to the Australian Securities and Investments Commission (ASIC) six months late – shows it has an even bigger credit against the mining tax worth $1.16 billion.
Fat Prophets resources analyst David Lennox says those credits can be used to directly reduce miners’ MRRT liabilities now and into the future, until they run out.
“Exactly as we saw with BHP, Rio and Fortescue, they [Hancock] actually booked a credit for the minerals resource rent tax for 2012 of $1.2 billion,” he said.
“That means that they believe over the next few years they’re not likely to pay any tax under that legislation.”
However, Hancock does not have the biggest mining tax offset.
Fortescue Metals has repeatedly said it does not expect to pay any mining tax in the “foreseeable future”, and a look at page 85 of its financial year 2012 annual report reveals why.
The company has estimated that it has an MRRT credit of almost $3.5 billion – a figure overlooked in coverage of Fortescue’s results because it was buried so far down in the report, unlike BHP, Rio and Hancock, which included their mining tax credits in their profit and loss statements.
Fortescue’s estimated tax asset brings the total mining tax credits of the big four iron-ore producers to almost $6.4 billion.
“Over future periods they’re entitled to deductions because the values of their assets for tax purposes are deemed to be higher than the book value they use for their assets in their financial statements,” observed Jeffrey Knapp, a University of New South Wales accounting lecturer.
What this means is that, regardless of commodity prices, these big mining companies have enough tax offsets stored to see them pay no, or little, federal mining tax for the next couple of years.
Once the tax credits run out, MRRT collections are likely to rise significantly, if the tax still exists in its current form in several years’ time, and should iron ore prices remain historically high.
So far, from the publicly available profit reports, it is known that BHP Billiton paid $77 million in the first six months of the MRRT, and Rio Tinto and Fortescue paid nothing.
The amount of tax Hancock Prospecting paid will not be known until it submits its financial year 2013 accounts, due by October 31 this year.
Hancock’s financial reports
However, Hancock’s 2012 accounts were lodged with ASIC six months late, and its previous six financial reports were all lodged more than a year late, with the 2010 accounts well over two years late when lodged on Christmas Eve last year.
While, as a private company, Hancock is not obliged to file financial reports for the benefit of the market, s319 of the Corporations Act requires large companies to submit their annual report regardless of whether they are publicly-listed or not.
Hancock has not responded to questions from the ABC about why its reports were late, or whether it intends to file future reports on time.
They’ve paid $500 million of tax for the year to 30 June 2012. That’s a strong contribution to the Australian economy.
The lack of MRRT payments does not mean the companies are not paying any taxes at all.
Jeffrey Knapp says Hancock Prospecting’s accounts show its contribution to public finances.
“If you look in their financial statements you can see they’ve paid $500 million of tax for the year to 30 June 2012. That’s a strong contribution to the Australian economy,” he said.
That tax was out of a statutory profit of $3.27 billion for financial year 2012 – a figure boosted by the one-off recognition of the mining tax credit and a billion-dollar sale of Queensland coal assets.
Hancock’s revenue ($2.31 billion) and its underlying profit excluding those one-offs (around $1 billion) were both down slightly on 2011.
David Lennox says they are likely to fall again this year.
“Certainly there’s no doubt that we will see those revenue numbers perhaps falling again as a result of the lower [iron ore] pricing environment that we will see through [financial year] 2013,” he forecast.
Mr Lennox says Hancock is still in good shape, despite the commodity price falls, but it may look at reining in costs that grew by almost a third to nearly $1 billion last year.
“They will be looking to cost cutting to certainly stimulate the bottom line and also probably some slowing down of capital expenditure in terms of projects that they were looking at that they will now delay to a point in the future,” he added.
Media losses
Gina Rinehart’s company also suffered a financial hit from the mining magnate’s media ownership: in 2012 Hancock Prospecting booked a $222 million fall in the value of its “available for sale” financial assets, which are mostly shares that can be easily traded on the market.
Hancock looks likely to have more mixed fortunes on those investments this year.
The Fairfax shares held by Hancock fell to 55.5 cents by the June 30 record date in 2012 and, despite falling lower still during the current financial year, are now higher at 63.5 cents.
However, Mrs Rinehart’s Ten Network shares will offset any Fairfax gains, falling from 50.5 cents on June 30 2012 to 30.5 cents currently.
At the current share prices, Hancock Prospecting holds about $78 million worth of Ten shares and $224 million worth of Fairfax stock.

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TAX SCANDAL THREATENS CHARITY DONATIONS
REGULATOR STANDS ACCUSED OF COWARDICE AND BRINGING THE WHOLE SECTOR INTO DISREPUTE

Sanchez Manning, The Independent, 8 May 2013

The Charity Commission’s handling of a high-profile tax-avoidance scandal that saw shockingly little donated money reach good causes has put charities at risk of losing the public’s confidence – and consequently their money, one of the leading figures in the sector has warned.
Sir Stuart Etherington, chief executive of the National Council for Voluntary Organisations (NCVO), the UK’s largest charity association, said the regulator had brought charities into “disrepute” by failing to act over the controversy.
The Cup Trust was exposed in January as giving only £55,000 to good causes despite raising £176m over two years as part of a scheme in which donors were suspected of claiming millions in tax relief through an abuse of the Gift Aid scheme. But after a 24-month investigation, the Charity Commission, chaired by William Shawcross, allowed the Cup Trust to remain on the charity register.
Sir Stuart condemned the decision in a speech he gave at a conference in London. He said that “the complete lack of intervention by the commission in this whole affair has brought damage and disrepute to the sector as a whole, putting us at serious risk of losing the trust and confidence of the public”.
He continued: “What was so obvious in the Cup Trust case is how a legalistic approach dominated common sense, meaning that decisions were made following the letter of the law rather than the spirit, no matter what disastrous consequences this caused.
“It seems that, in the case of the Cup Trust, the commission was so concerned about what it couldn’t do that it didn’t do what it could do.”
In a sustained attack at the conference organised by the Association of Charitable Organisations, Sir Stuart further criticised the performance of senior Charity Commission representatives in front of the Public Accounts Committee in March.
He argued it had “raised serious concerns about the regulator’s handling of the case, and more generally about its operation”.
The NCVO head said that, as a result, the commission’s credibility as an effective regulator had been seriously undermined – speaking of “accusations that it is a paper tiger – not so much a light-touch regulator as a no-touch regulator”.
He added that the commission had some fundamental questions to answer over its leadership and “lack of direction” and “disappointing lack of bravery”.
The regulator last night denied claims it had failed to act, saying that it had launched a formal inquiry into the Cup Trust in April after receiving new information from HM Revenue & Customs (HMRC).
An interim manager was also appointed by the commission to take control of the charity.
Michelle Russell, head of investigations and enforcement at the Charity Commission, said: “We have had ongoing concerns about the charity’s involvement in the Gift Aid scheme and the potential for damage to public trust and confidence.
“While we took no regulatory action pending HMRC’s determination of the charity’s Gift Aid claims, we have continued to look at the trustee’s handling of its responsibilities and duties.
“We always made it clear that if new information came to light, we might open a further investigation. In the light of our ongoing concerns, when we received new information from HMRC, we took immediate steps to open a statutory inquiry.”
In response, the Cup Trust has made a formal appeal to the Charity Tribunal against the commission’s inquiry.
The buck stops here: William Shawcross
William Shawcross, who took over as Charity Commission chairman in October, has a background in aid work and human rights. From 1997 to 2002, he was on the council of the Disasters Emergency Committee. Educated at Eton and Oxford, he studied sculpture at St Martin’s College of Art. After university in 1968, he went to Czechoslovakia and saw the country’s uprising against Soviet rule. He reported on the Vietnam War and has written 12 books on international conflicts.

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PROMISEWATCH 2013: HENRY (REMEMBER HIM?) AND TAX

Andrew Crook and Adrian March, Crikey, 6 May 2013

Surprisingly for such a flaming hot issue, in recent decades the political struggle over tax appears to have dimmed. Three years after the Henry Review, Crikey senior journalist Andrew Crook and CPD researcher Adrian March find out: where do the parties stand on tax?
There is perhaps no bigger core ideological issue for Australia’s political parties than taxation. If the Labor Party was founded to ensure a fairer redistribution of capitalism’s surplus and the Liberal Party as a check on that progressive tendency, then tax should by rights remain a key battleground.
Surprisingly for such a flaming hot issue, in recent decades the political struggle over tax appears to have dimmed. Last year’s budget papers showed Australia’s tax-to-GDP ratio is much lower than most OECD countries and as a proportion of GDP since Gough Whitlam tax was actually lower under the Labor governments of Bob Hawke (22.3%), Paul Keating (20.7%) and Kevin Rudd (21.45%) than under Liberal PM John Howard (22.3%).
Nevertheless, as part of the 2008-09 budget, the Rudd government announced an overhaul of the Australian tax system as business pressure for “simplification” increased. The Henry Review, known formally as “Australia’s Future Tax System“ was chaired by then Treasury Secretary (and wombat fan) Ken Henry. His report was released to the public in May 2010.
Henry was charged with making “recommendations to create a tax structure that will position Australia to deal with the demographic, social, economic and environmental challenges of the 21st century and enhance Australia’s economic and social outcomes”.
In total, Henry produced 138 recommendations, most of which were ignored by the Rudd and Julia Gillard governments. These recommendations stemmed from the first recommendation of the Henry Review itself — that tax revenue should be drawn from four efficient, broad-based taxes: personal income, business income, rents on natural resources and land, and private consumption (p. 80). Henry argued that all other taxes should be phased out, except taxes that address social and economic costs, such as tobacco, alcohol or environmental damage. Overall, the review argued for a simplification of the tax system.
While not a comprehensive list, some of the key changes included:
•    A reduction in company tax to 25%;
•    A higher personal tax free threshold of $25 000; and
•    Introduction of a resources rent tax.
So, three years after Henry, where do the parties stand on tax?
Labor:
The ALP outlined its general tax principles in its National Platform, released after Labor’s 46th National Conference in 2011.
Broadly, Labor considers a fair tax system would encourage all Australians to work, equitably distribute wealth and allow governments to provide public services. However, Labor also supports the allocative efficiency of markets, “except where interventions would address market failures and serve environmental or social purposes”.
The National Platform states that Labor tax reform would ensure “everyone pays their fair share of tax” and specifically mentions that executives and the wealthy should pay a “fairer” share of tax. The stated goal of these reforms is to ensure that all levels of government have a sound revenue base for investing in social and economic infrastructure and quality public services.
The Rudd Labor government announced its response to the Henry Review in May 2010. The centrepiece of this announcement was the Resources Super Profits Tax (RSPT), a 40% tax on mining profits, in addition to the normal level of company tax. All non renewable resources were included, although companies could claim a number of deductions for state royalties and depreciation. The RSPT would have been accompanied by a cut in company tax from 30% to 28%, to be slowly introduced by 2014-15.
The government also announced an increase in the rate of employer compulsory superannuation, which would be gradually increased from the current rate of 9% to 12% by 2019. The increase in superannuation was not a recommendation of the Henry Review, but had been a longstanding Labor policy from Paul Keating’s time as treasurer.
Through the rest of 2010, the government implemented 12 other measures based on reforms identified by the Henry Review. But all other recommendations failed to adopted. The government also explicitly ruled out 19 Henry Review recommendations that it would never implement.
After negotiations with the mining industry, the Gillard government scaled back the RSPT. The new Mineral Resources Rent Tax (MRRT), only covered coal and iron ore and had a headline tax rate of 30%. This was accompanied by a reduction in some of the linked measures, including an announcement that company tax would be reduced to 29%.
The reduction in company tax was cancelled in the 2012-13 budget, leaving the tax at 30%.
To help pay for the National Disability Insurance Scheme, Labor will increase the Medicare levy by 0.5 percentage points, from 1.5% to 2%, a change that the prime minister wants to make permanent. However, the levy will only cover half of new annual spending under the NDIS, or “DisabilityCare”, as the government has dubbed it.
The Coalition:
Opposition Leader Tony Abbott’s new book sets out the Coalition’s “plan for government”. It does not specifically mention the Henry Tax Review but does outline several potential Coalition tax policies. It complements two policy documents released prior to the 2010 election.
The Coalition released a document in 2010 outlining its core economic beliefs, entitled Coalition Economic Principles: Rebuilding Sustainable Prosperity. It attempts to articulate the intellectual basis of the Coalition’s tax policy.
The Coalition’s guiding light is that the “rights and choices of individuals are paramount”:
“The Coalition acknowledges that government has a role in raising taxes and other revenue, formulating laws and regulations, and spending money to achieve legitimate social objectives. However, the government’s powers to spend and to regulate need to be exercised with caution. Taxes must be as low, as fair, and as simple as possible.”
The Coalition provided some of its specific tax policies in a 2010 pre-election document, The Coalition’s Economic Action Plan.
The Coalition has announced that it would repeal both the Mineral Resources Rent Tax and the Clean Energy Bill if it wins the 2013 election. It intends to meet Australia’s Renewable Energy Target commitments through a Direct Action Plan referred to uncharitably as “soil magic”. The Coalition believes the plan would cost $3.2 billion over four years. Direct Action purports to reduce carbon pollution by establishing a Emissions Reduction Fund, which will then “buy” carbon from firms that reduce their carbon emission below a historic average.
Other key tax policies include:
•    An initial promise to reduce the company tax rate from 30% to 28% although this has since been modified to a “modest” reduction in company tax;
•    Publicly release all of the all the costings, modelling and other data underlying the Henry Review recommendations;
•    Develop a taxation white paper; and
•    All PAYE taxpayers will receive a taxation receipt that provides details on how their tax money has been spent.
The Coalition has also planned to introduce a $4.3 billion Paid Parental Leave Scheme. Mothers would be given 26 weeks’ paid parental leave at full replacement wage (up to a maximum salary of $150,000 per annum) or the federal minimum wage, whichever is greater. The scheme would be funded by a 1.5% levy on about 3300 Australian companies with taxable incomes in excess of $5 million. In practice, this means some companies will have their company tax cut partially reversed, although Abbott has claimed some companies would still benefit from the tax cuts under related policies to be released after the budget. Liberal backbenchers are starting to make their feelings clear about the tax, citing traditional Liberal principles of a non-interventionist state as reasons to junk it.
After the government farcically tried to wedge the Coalition on funding for the NDIS to try and make the scheme an election issue, Abbott called the PM’s bluff, announcing he would support the levy “with conditions”, including a repeal of the impost when the budget returns to surplus (unlikely in the short or medium term).
The Greens:
The Greens believe that the taxation system should allow government to provide an appropriate level of government services. They believe that government has a significant role in managing the Australian economy, including government ownership of natural monopolies, government intervention to prevent market failure and government borrowing to fund long term infrastructure investments.
In general, the Greens favour progressive taxes (such as income taxes) rather than regressive taxes (such as the GST) to provide revenue.
The Greens supported several recommendations from the Henry Review and were disappointed that the Labor government did not implement additional recommendations ). They focused on the recommendations of the Henry Review to broaden the tax base to include resource exploitation and pollution.
The Greens supported the review’s proposals to tax carbon and resource extraction. However, they argued that the government should have increased the taxes on both resources and carbon. In regards to a resources tax, they argued for the establishment of a sovereign wealth fund. The Greens also supported recommendations in the Gonski Review to increase welfare programs, particularly support for students and jobseekers.
However, the Greens depart from the Henry Review on several significant tax issues. The Greens support an increase in company tax to 33%; the Henry Review advocated a gradual reduction in the rate to 25%. The Greens also support an estate tax — Henry was broadly supportive of an tax but didn’t include it amongst its recommendations.
The Greens also want to introduce a new top marginal tax rate of 50% on incomes of $1 million or over.
The party is fully supportive of the NDIS levy.

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SENATE PASSES BILL TO WIDEN TAX COLLECTION ON THE WEB

Jonathan Weisman, The New York Times, 6 May 2013

WASHINGTON — A bipartisan coalition in the Senate easily passed legislation on Monday to force Internet retailers to collect sales taxes for state and local governments, sending the issue to the House, where antitax forces have vowed to kill it.
But the 69-to-27 vote in the Senate will give the measure significant momentum. Hundreds of retailers are flying to Washington this week to pressure House lawmakers and counter the arguments of small-government groups, including Grover Norquist’s Americans for Tax Reform, which wields great influence in the House.
“After 20 years, there is finally light at the end of the tunnel for our brick-and-mortar businesses,” said Representative Steve Womack, Republican of Arkansas, and the bill’s House sponsor. “Saving local retail business depends on it, and it’s now up to the House to act.”
The Internet sales tax bill — called the Marketplace Fairness Act — is a rarity in Washington these days, a significant tax measure that has split antitax groups in Washington from reliably Republican Main Street businesses beyond the capital. That divide has given the measure at least a chance to reach President Obama, who supports it.
With Republicans in Congress equally split, Senator Richard Durbin of Illinois, the Senate’s No. 2 Democrat, joked Monday that C-Span watchers would see something “historic” and “precedent-setting:” “The Senate is actually going to vote for a bill.”
The legislation would allow states to force online retailers with more than $1 million in annual out-of-state sales to collect sales taxes from all customers and remit those taxes back to state and local governments. States would have to provide software to help calculate the taxes for thousands of jurisdictions.
Its sponsors intentionally kept the bill simple — just 11 pages in length — to ease passage. In contrast, the Congressional Joint Committee on Taxation on Monday released a 568-page report to the House Ways and Means Committee on options for overhauling the tax code compiled by 11 bipartisan House working groups tackling that issue. The release was intended to push forward comprehensive tax reform, but it only underscored how difficult a task that will be in a divided Congress.
The Senate Internet tax debate revolved around advocates’ arguments that applying sales taxes online is only fair, since traditional brick-and-mortar retailers must levy such taxes already. Supporters said the bill was not a tax increase but a guarantee that taxes already owed would actually be paid. The Senate, they said, was standing up for the right of states to collect taxes as they see fit.
“The first thing we have to make sure everybody understands is this isn’t a tax issue,” said Matthew Shay, chief executive of the National Retail Federation, which pushed for the legislation. “States determine the level of sales taxes to be collected. All we want to do is make sure the taxes are collected that are due.”
But opponents say they will try to slow the process down in the House and shift the conversation to their issues: fears that the complexity of collecting the taxes will put many Internet retailers out of business or subject them to an avalanche of audits from state and local governments around the country.
In a “Memo for the Movement,” a coalition of 52 conservatives on Monday demanded that House Republican leaders not bring the Senate bill straight to the House floor and also said House conservatives “should reject any bill that expands the authority of out-of-state governments to regulate businesses with regard to online taxation.”
Signers included Mr. Norquist, the keeper of the no-new-taxes pledge that almost every Republican in Washington has signed, conservative luminaries including Phyllis Schlafly and Richard Viguerie, and the heads of Heritage Action, the Heritage Foundation’s political arm, the Tea Party Patriots, Americans for Prosperity and FreedomWorks.
“We’re fairly confident that at the very least, we will slow this down,” said Dan Holler, a spokesman for Heritage Action. “Then we have to make the arguments that can win.”
With conservatives in Washington organizing against it, the bill faces an uphill climb in the House, but not a steep one. The House bill already has 65 co-sponsors, almost half of them Republican, and those Republicans include veteran conservatives like Representatives Joe Barton of Texas and Spencer Bachus of Alabama. Proponents point to their own conservative supporters, including Al Cardenas, chairman of the American Conservative Union, and Arthur Laffer, a conservative economist.
The House Judiciary Committee chairman, Bob Goodlatte of Virginia, has said he will at least consider the measure. After the Senate’s passage, Mr. Goodlatte made it clear he would take his time with the legislation and would insist on significant changes. He suggested he may force more uniformity in sales tax rates and add legal recourse for Internet retailers facing multiple audits. But he did not indicate he planned to delay the issue in his committee. Conservative voices in Washington are being countered by reliably Republican business voices from home. Representative Tom Price, Republican of Georgia and a House conservative leader, said Monday that he was just starting to hear from both sides, including district retailers coming to his office.
Mr. Price said he was undecided on the issue, but he noted the bill would now go to the House Judiciary Committee, not the tax-writing House Ways and Means Committee. That itself could ease the bill’s passage.

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CUTTING TAX COMES BACK TO BITE YEARS DOWN THE LINE

Ross Gittins, The Guardian AU, 4 May 2013

If you’re a rusted-on supporter of the Coalition there can’t be a shadow of a doubt that all the budget problems we’re hearing about are the product of the Gillard government’s incompetence. And if you don’t think much about economics it’s perfectly believable.
After all, the budget had been in surplus for eight years straight when the Howard government lost office in late 2007. In that time Peter Costello not only paid back the $96 billion net public debt he inherited from Labor, he clocked up a credit balance of $45 billion.
In marked contrast, Labor’s first budget went straight into deficit and has stayed there ever since, despite its solemn promise to get back to surplus this year. Wayne Swan soon chewed up all the money the Libs left him and racked up a net debt of about $140 billion and counting.
What more do you need to know?
Well, a bit of economics would be nice. Failing that, a bit of commonsense. The good guys/bad guys story I’ve just told rests on two silly assumptions.
First, everything that happens to the federal budget happens because of the actions of the government. Nothing happening in the rest of the economy – or the rest of the world – could possibly affect the budget balance. In other words, nothing happens that’s beyond the treasurer’s control.
Second, from the day a new treasurer takes over, everything that happens must be in consequence of his actions. Nothing his predecessors had done could still be having an effect on the budget long after they’d been tossed out.
Clearly, life – and budgeting – is a little bit messier than that. Economists well know that things beyond the treasurer’s control actually have a bigger effect on the budget than things that are within the government’s control.
That’s true regardless of whether you’re Labor or Liberal and whether what the economy does to your budget is good or bad.
It’s equally true that some of the decisions made by a treasurer can still be affecting his (we’ve never had a female treasurer) successors many years later.
So, as with everything else in work or life, the budgetary performance of a government is some combination of luck and management.
Costello’s management was good in many respects but, as we’ll see, not as good as many have assumed. Swan’s management has been the opposite: far from perfect, but not as bad as it has suited many people to claim. As for luck, there’s no contest: Costello’s luck was great; Swan’s has been lousy.
To a partisan of the right, the trouble Swan is facing in getting the budget back to surplus any time in the foreseeable future is explained solely by Labor’s chronic inability to stop spending. All the recent talk of ”structural” (that is, long-lasting) problems on the revenue side of the budget is just excuse-making.
It’s true Labor has trouble controlling its urge to splurge. But it’s also true that the slowness of tax collections to return to their normal healthy rate of growth as the economy grows is partly the result of weaknesses that go back to decisions made by the Howard government.
Increasingly, economists are realising our governments mishandled the revenue windfall from the first phase of the resources boom, spending too much of it and saving too little.
Not only did John Howard allow government spending to grow at Labor-like rates in the noughties, but Costello responded to the temporary boost in collections from company tax by cutting income tax eight years in a row (though, to be sure, the last three of his cuts were actually delivered by Labor).
Usually, income tax is cut only every three years or so, and cut close to an election so voters haven’t forgotten it happened. Does it surprise you that cutting income tax so much can reduce its revenue-raising power today and in coming years? It shouldn’t.
The Australia Institute has used the well-regarded Stinmod micro-simulation model to estimate that, had the income-tax scale for 2004-05 still been in use last financial year, 2011-12, collections from the tax would have been almost $39 billion higher.
Now, you may object that we couldn’t have gone for all that time without any tax cut. Since our tax scales aren’t indexed for inflation, we need regular tax cuts just to counter the effect of bracket creep.
Fair point. So next the institute compared the actual tax scale in 2011-12 with the 2004-05 scale with its tax brackets indexed up to allow for all the inflation in between. It found the indexed scale would have raised an additional $25 billion. So Costello’s many tax cuts cut the real rate of income tax – on the strength of a surge in company tax collections that proved to be temporary.
Think how much smaller the budget deficit (and the accumulated debt) would be now had he limited himself to offsetting the effect of bracket creep. (Remember too that, particularly in the years before the global financial crisis, his decisions to spend rather than save the tax windfall from the resources boom obliged the Reserve Bank to raise interest rates higher than otherwise, to prevent this recycling from causing inflation.)
It’s worth noting that the successive tax cuts were biased in favour of the better-off, with the cut-in point for the top tax rate trebled to $180,000 a year. As a result, the value of tax cuts going to the top 10 per cent of income earners exceeded that of the cuts going to the bottom 80 per cent.
If that doesn’t convince you responsibility for the present and future state of the budget has to be shared between Labor and the Coalition, remember the other irresponsible revenue decision Costello made when the government was temporarily flush with funds: making income from superannuation totally tax free for people 60 and over.
Even at the time, economists warned this handout to the better-off was unsustainable – and so it has proved.

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INTERNET RETAILING
TAX IN CYBERSPACE
ONLINE RETAILERS MAY SOON HAVE TO COLLECT SALES TAX. AMAZON, ODDLY, IS GLOATING

The Economist, 4 May 2013

AMAZON, which became America’s biggest internet retailer by selling things more cheaply than anyone else, used to go to great lengths to avoid collecting sales tax from its customers. It issued a map showing employees which states to avoid lest they give the authorities a target for enforcement (some of the biggest states were coded red). In 2011 it shut down a warehouse in Texas after the state’s government demanded $270m in back taxes.
The taxmen are now catching up. On May 6th the Senate is expected to approve a bill requiring internet merchants to collect sales tax due in other states. The House of Representatives may follow. Politicians are heeding howls from bricks-and-mortar retailers that current law gives Amazon and its kind an unfair advantage. State governments reckon that tax avoidance by online retailers costs them roughly $11 billion a year. If the Marketplace Fairness Act passes, states will get some extra cash. Yet Amazon is unruffled.
The Seattle-based super-merchant is already collecting tax in some big states, including California, Pennsylvania and Texas, and is no longer fighting a national regime. Best Buy, an electronics retailer that has suffered much from Amazon’s onslaught, says its sales rose by 4-6% in states where Amazon started collecting tax. But there will be no let-up for old-school retailers. “Closing the loophole won’t level the playing field,” says Sucharita Mulpuru of Forrester, a research firm. Amazon’s retreat on taxes signals a redoubling of its logistics offensive, thumping rivals even harder.
When it comes to putting goods into shoppers’ impatient hands, traditional retailers still have an edge. Customers of Walmart, America’s biggest retailer, can order online and pick up purchases in stores. Macy’s, a department-store chain, plans to fulfil online orders from 500 shops (rather than warehouses) this year, which will let it offer same-day delivery to customers’ homes. But Amazon is catching up. In ten American cities it offers same-day delivery on some items. Lockers in convenience stores let customers pick up Amazon packages rather than waiting for them at home.
In its early days, when price trumped speed, Amazon built huge warehouses far from most customers (and tax collectors). Now that it has caved in on tax “it can optimise distribution logistics completely,” says Ken Sena of Evercore, an investment bank. The idea is to build automated distribution hubs closer to population centres, making same-day delivery commonplace. Amazon’s plans for the next two years include warehouses in California, Texas and New Jersey, according to MWPVL, a logistics consultancy. With 40-50 “fulfillment centres”, it can conquer the country, says Marc Wulfraat of MWPVL.
As service improves and market share grows, Amazon’s fixed costs per order should drop. It is widely expected to acquire its own fleet of delivery trucks, bringing it into direct competition with firms that now carry parcels on its behalf, such as FedEx and UPS.
Not all e-tailers are so upbeat. Blue Nile, which sells diamonds, says in its annual report that having to collect tax could “substantially harm our business”. EBay, Amazon’s smaller rival, feels vulnerable. Like Amazon, it is a platform for other merchants, but its partners are smaller than Amazon’s, says Mr Sena. Small firms will find it hard to comply with America’s myriad local rules. The Tax Foundation, a think-tank, counts 9,646 separate American jurisdictions that levy sales tax.
EBay has blasted out e-mails to customers and merchants urging resistance. Forcing retailers to collect tax from customers will make it “harder for small businesses to grow into big businesses,” says Brian Bieron, the company’s top lobbyist. Mr Sena thinks the blow to eBay itself will be modest. It’s good to be an incumbent.

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TREASURY SAYS TAX SYSTEM MISSES DIGITAL

Georgia Wilkins, The Sydney Morning Herald, 3 May 2013

Assistant Treasurer David Bradbury said ‘we need to make sure wae are doing everything possible.’
There is serious concern that Australia’s tax system is failing as global technology companies shift profits into low-tax jurisdictions, a Treasury paper has warned.
The Treasury document comes a day after the body representing companies including Apple, Google and Microsoft hit back at the government’s efforts to force disclosure of the amount of tax they pay here.
The issues paper was released by a government-appointed taskforce to advise Treasury on tax erosion.
It said the shift towards knowledge-based goods and services, such as online advertising, had left Australia’s tax system unsustainable.
”The global reach of multinational enterprises, along with the developments in information and communication technology … provides them with a high degree of flexibility in how to structure their affairs.”
The impact of the global financial crisis on government tax revenues around the world had triggered greater attention to elaborate tax minimisation strategies, such as the so-called ”double Irish-Dutch sandwich”, which companies such as Apple used to avoid corporate tax rates in Australia.
However, it admitted it had insufficient data to measure the scope of tax avoidance committed by multinational firms, which are able to exploit gaps in the international tax system through complex ownership structures. ”These developments raise serious concerns about the efficiency, equity and sustainability of the income tax system.” It called on submissions that addressed possible solutions to tax erosion and any data that would assist the Tax Office identify profit shifting.
The report comes after a Senate hearing on Tuesday into the tax avoidance and multinational profit-shifting bill, expected to be introduced soon.
Both are part of a broader push by the federal government to clamp down on multinational tax avoidance, which also includes a bill that would force companies to disclose how much tax they pay.
The Australian Information Industry Association said that if the government’s efforts meant a ”naming and shaming” of implicated companies some might pull out of the local market and lead to job losses.
But Assistant Treasurer David Bradbury said the moves would tighten loopholes and protect more than $10 billion of revenue over the next four years. ”We need to make sure we are doing everything possible through our domestic laws to keep up with the changing nature of global commerce in the information age.”

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GOVT SEEKS VIEWS ON MULTINATIONALS TAX

The Sydney Morning Herald, 3 May 2013

The federal government is seeking views on ways to prevent multinationals rorting the tax system in a bid to protect Australia’s revenue base.
Assistant Treasurer David Bradbury said the government has already moved to tighten a series of loopholes that will protect more than $10 billion of revenue over the next four years.
The government issues paper released on Friday looks at profit shifting by multinationals, and their aggressive tax minimisation methods, and was developed in consultation with experts from the community sector, academics, business and the tax profession.
“Multinationals should not be able to use aggressive tax practices to get an unfair advantage over firms that pay their fair share,” Mr Bradbury said in a statement.
“We need to make sure that we are doing everything possible through our domestic laws to keep up with the changing nature of global commerce in the information age.”
He said governments all around the world also need to re-examine many key rules of international taxation.
The Tax Institute’s senior tax counsel Robert Jeremenko described the discussion paper as “all tip and no iceberg”.
“For all of its motherhood statements, the paper contains no practical solutions to further Australia’s role in the important global initiative to address base erosion,” he said in a statement.
Submissions are due by May 31.

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THIS TAX WOULD BOOST NATION’S ECONOMIC PERFORMANCE

Peter Martin, The Sydney Morning Herald, 2 May 2013

Regardless of whether it passes into law, Treasury rules dictate that the proposed NDIS levy will boost the May budget bottom line by $3b. Peter Martin explains.
Joe Hockey is wrong. The shadow treasurer said on Wednesday he did not see a national disability insurance scheme levy as ”the right solution in this environment”.
”If the economy is underperforming, you don’t tax it to increase performance. You never tax and regulate your way to prosperity,” he told Sky News.
Some things are worth doing precisely for the reason that they will boost Australia’s economic performance… The national disability insurance scheme is one of them.
He is quite right to say that taxes by themselves can’t improve economic performance. But they can improve economic performance if they are used for the purpose of improving economic performance.
The Productivity Commission examined the question in its 2011 inquiry chaired by Patricia Scott, who worked for Joe Hockey as the head of his human services department in the Howard government.
It found that whereas the financial cost of the national disability insurance scheme would be $6.5 billion, its economic cost was far less. The $6.5 billion was merely ”a transfer of resources from one group to another”.
The economic cost would be about $1.6 billion, flowing from the distortionary impacts of raising the revenue.
”Given this, the NDIS would only have to produce an annual gain of $3800 per participant to meet a cost-benefit test,” the report said.
”Given the scope of the benefits, that test would be passed easily,” it concluded.
One of the economic benefits was what it did for the lives of the people it helped, another its success in bringing into the workforce Australians who were previously unemployable for life.
It expected an employment gain of 220,000. This isn’t the same as the employment gain often claimed by promoters of major projects, which amounts to no more than moving existing workers from one region to another.
The commission meant new workers able to produce things for Australia they otherwise would not have.
As the population ages and the supply of workers for each non-worker shrinks, finding extra workers will become the main game in town.
The commission said the new workforce would be likely to help push gross domestic product 1 per cent higher than it would have been by the middle of the century.
Some things are worth doing precisely for the reason that they will boost Australia’s economic performance. Whatever its other merits, the national disability insurance scheme is one of them.

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POKER MACHINE TAX BREAKS ‘LACK TRANSPARENCY’

Sean Nicholls, The Sydney Morning Herald, 2 May 2013

A state government scheme that allows registered clubs to get tax breaks on poker machine profits if they spend money on community facilities is poorly run and needs to be more transparent, the NSW Auditor-General has found.
In a performance audit released on Thursday morning, Peter Achterstraat says oversight of the ClubGrants Scheme by the Office of Liquor, Gaming and Racing (OLGR) is not good enough to ensure the money is being spent properly by clubs.
Taxpayers have the right to know that clubs are using these rebates to benefit the community.
The Auditor-General also found that, during 2011-12, $9 million in poker machine profits was used by the government to fund election commitments, including upgrades to sports stadiums at Leichhardt and on the Central Coast.
“This is government revenue foregone, but oversight of the ClubGrants scheme is not good enough to ensure this money is being spent properly,” Mr Achterstraat says.
“Taxpayers have the right to know that clubs are using these rebates to benefit the community. OLGR needs to clarify the rules, pump-up the processes and monitor more.”
Under the scheme, registered clubs are entitled to a maximum 2.25 per cent rebate on their poker machine profits over $1 million.
Since it was introduced in 2002, $417 million worth of tax breaks have been paid out to clubs. Last year, 472 clubs participated in the scheme.
Clubs can apply for the tax break on poker machine profits if they spend money on projects classified into three categories.
• Category 1 – for which the tax break is up to 0.75 per cent – covers projects designed to improve living standards of disadvantaged community members.
• Category 2 – to which a maximum 1.1 per cent rebate applies – is projects classified as a club’s “core activities”.
• Category 3 is a state-wide funding pool for large-scale projects associated with sport, health and community infrastructure from 0.4 per cent of poker machine profits.
Mr Achterstraat says “an absence of proper monitoring” of Category 1 expenditure meant there was “limited assurance that Category 1 is effectively managed”.
The audit found that the tax rebate approval process “is not robust” and public reporting on the scheme is “limited”.
The report says that tax breaks are being delivered before clubs provide evidence of how the money has been spent.
When OLGR assesses individual tax rebates, the audit found that they are “based on minimal evidence” and “there are no procedures in place to provide an objective review”.
The department told the auditors that a lack of resources meant it was “difficult to conduct a thorough review of the tax rebate returns.”
There was a “lack of transparency” in how funds were spent in Category 2 – which attracts the highest rebate of 1.1 per cent – because there were no guidelines as to how they should be administered.
Last year, the guidelines for what money can be spent on were altered to include spending on projects such as club sport, golf courses and bowling greens – and even wages paid to staff to carry out maintenance.
As well, tax breaks could be claimed for “professional sport purposes”, including the National Rugby League, but excluding player payments.
However, Mr Achterstraat says the audit found the guidelines were “vague on what can be funded”. This meant that funding decisions “are not transparent”.
“Clubs make decisions based on club philosophy, lobbying by potential recipients, projects they would like to fund or have had a history of funding,” the report says.
An analysis of spending in Category 2 spending last financial year found that $37.9 million worth of claims were submitted by clubs for “sport”.
The next highest was $7.1 million for “community activities”, followed by $3.4 million for “club facilities”.
It found some of the spending was questionable, such as $311,000 to upgrade golf machinery to ensure compliance with workplace health and safety laws.
Guidelines existed for Category 3 expenditure, which was introduced by the O’Farrell government in 2011, but the processes set out in the guidelines have yet to be established.
In 2011-12, $9 million was paid by clubs into the Category 3 funding pool, all of which was spent on O’Farrell government election commitments at the request George Souris, who is the Minister for Tourism, Major Events, Hospitality and Racing.
They included $2.2 million on Lambert Park at Leichhardt and $1.8 million on Pluim Park, home to the Central Coast Mariners.
The audit said there was a “lack of information” about why the grants were made “except that it was an election commitment”. There was also little detail about the breakdown of costs or timeframes and performance indicators.
In a response to the audit, the Department of Trade and Investment says that “some of the observations in the report do not take account of the principles underpinning the scheme’s operation, much of which is determined by government policy”.
A spokesman for Mr Souris said the Coalition had flagged its intention to fund the promises from the ClubGrants scheme before the election.
He said Mr Souris has approved the establishment of a new ClubGrants Funds committee to support the minister in considering applications for Category 3 grants and develop mechanisms to monitor expenditure.
The government would ‘‘take steps to target improvements in key areas’’ of the ClubGrants scheme, including through a review of the guidelines.

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TAX TRANSPARENCY CAMPAIGNERS GIVE CAUTIOUS WELCOME TO TREASURY DEAL

James Ball, The Guardian, 2 May 2013

Tax transparency campaigners have cautiously welcomed a deal between the UK Treasury and British overseas territories including the British Virgin Islands, but have warned that further, swift action will be necessary in order to tackle Britain’s offshore havens.
The Treasury announced on Thursday that all of Britain’s overseas territories – countries nominally still under the UK’s auspices, but in practice self-ruled – had agreed to new rules to automatically share information on individuals holding bank accounts in their country, with the UK as well as France, Germany, Italy and Spain.
The agreement, signed by Bermuda, the BVI, Anguilla, Montserrat and the Turks and Caicos Islands, means they will automatically share information including names, dates of birth, addresses and bank account numbers, in an effort to clamp down on offshore tax avoidance and evasion.
Campaigners said the new agreement showed the UK was able to effect reform when it applied “leverage” to its overseas territories, and the changes amounted to a promising start.
“It’s certainly a step in the right direction and it is great to see momentum building for greater financial transparency,” said the Global Witness director of campaigns, Gavin Hayman. “Co-operation from Britain’s overseas territories is critical, and should help generate buy-in from other G8 countries.
“The real prize lies in ensuring the ultimate owners of companies are made public – because secret company ownership helps facilitate tax evasion and arguably more heinous crimes such as drug and arms smuggling and state looting.”
The Guardian’s ongoing Offshore Secrets investigation showed usage of sham “nominee” directors and shareholders to mask real company owners was rife in the BVI and beyond, and these measures could allow wealthy individuals to use corporate secrecy to avoid even these new, tighter, information-sharing requirements. The BVI alone plays host to more than 1m offshore companies.
While the new measures ostensibly include accounts relating to trusts and non-trading companies, identifying which companies this applies to – and which have real owners from the affected countries – could prove difficult, if not impossible.
These risks were highlighted by the accountant Richard Murphy, of Tax Research UK, who said the requirements in the new agreement were very similar to existing EU treaties, might not prove to be enforceable, and excluded countries such as China and Russia – increasingly important clients of offshore financial services.
Murphy stressed much greater transparency was necessary to make the new deal effective.
“I welcome this, but so far it’s a good gesture and no more,” he said. “The reality of information exchange working, with all required back-up such as a fully functioning company and trust register, has to be in place to make this deliver on the promise.”
A spokeswoman for the Treasury said the EU treaties mentioned by Murphy primarily related to savings tax, while the new agreement covered income tax evasion – but acknowledged there was “some overlap” between the new and existing agreements.
In the wake of this initial settlement, focus is shifting to the forthcoming G8 meeting in June, which the UK is chairing. David Cameron has pledged to make transparency a key theme of the UK’s chairmanship, and further steps to tackle offshore secrecy are expected – or hoped for – by those in the process.
Prof Paul Collier, an Oxford University academic who has been advising No 10 on tax transparency before the G8, said the overseas territory announcement was a good example of what was to come.
“I think this is important progress. In effect, it is an example of the shock wave ahead of the G8,” he said. “Now that these countries know that change is afoot, they are pre-emptively trying to put their house in order – less humiliating than being forced into it. So, a thoroughly good thing and part of a much wider movement.”

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THE CORPORATE TAX GAME

Graham Bowley, The New York Times, 2 May 2013

Republicans and Democrats in Washington rarely agree on anything these days. But in recent months almost everyone seems to have coalesced around the notion that the corporate tax system is broken and needs to be fixed.
President Obama is for it. So are the two leaders of the tax-writing committees in Congress: the House Ways and Means chairman, Dave Camp, a Republican, and Max Baucus, the Democratic chairman of the Senate Finance Committee, who plans to retire next year and may be seeking a capstone for his career. The country’s biggest companies have declared loudly that they are in favor of revising the nation’s business tax system, too.
Despite the widespread support, the campaign for an overhaul is exposing deep fault lines within the business world that suggest it may fall apart. The problem is how to pay for everything lawmakers and businesses want without adding to the deficit.
The main goal of the advocates on both sides of the aisle is to lower the official corporate top rate from 35 percent, the highest among industrialized nations. Republican leaders and a large number of giant companies also want to end what they regard as the noxious practice of taxing the profits that multinational corporations earn abroad. The United States is one of the few countries to do so.
The only way to tackle such goals without losing revenue, however, is to close specific corporate tax preferences intended to promote various activities considered worthwhile by their supporters. There is plenty of money to be found: a Government Accountability Office study in March estimated the 80 or so business tax exemptions added up to about $181 billion in 2011, roughly the same size as total corporate tax revenue.
Yet each of these corporate tax breaks is worth a fortune to the industries they benefit — and fierce campaigning is under way, employing teams of lobbyists in Washington, to keep them in place.
“It is going to be practically impossible to get the rate down,” said Howard Gleckman, a fellow at the nonpartisan Tax Policy Center. “No one wants to cut their preferences.”
Since the last reduction in United States corporate tax rates, in 1986, other nations have reduced their own business rates; corporations complain this is putting them at a sharp competitive disadvantage. In reality, though, few companies pay the official rate.
Many pay at a much lower effective rate, taking advantage of numerous tax breaks and loopholes and using aggressive tax strategies to shift profits to more generous tax territories abroad. Among the companies benefiting from lower effective rates is General Electric, which has paid total corporate taxes — federal, state, local and foreign — equal to 17.9 percent of its cumulative $81 billion in earnings over the last five years, according to an analysis by S&P Capital IQ.
FedEx paid 20.1 percent, Amazon.com 6.6 percent and Ford Motor 4.2 percent. G.E. said its tax rate was unusually low over this period because it had big losses during the financial crisis. FedEx said it took advantage of temporary incentives to make new investments.
Congress, under relentless pressure from business interests, has allowed corporate taxes to dwindle as a source of revenue. In 2012, they amounted to about 1.6 percent of gross domestic product, half the level collected in 1970. By comparison, the individual income tax generated 7.3 percent of G.D.P. last year.
Many industrialized countries collect more than that percentage, although they, too, have to contend with a competitive globalized world where multinational companies can shift profits beyond the reach of local tax authorities.
“Income is increasingly difficult to nail down,” said Aswath Damodaran, a finance professor at New York University. “It is like nailing jelly to the wall. And the problem is only going to get worse rather than better.”
The two biggest corporate tax breaks are for accelerated depreciation of machinery and equipment, which saved corporations an estimated $76 billion in 2011, and deferral of foreign source income.
Deferral allows big multinational corporations to postpone paying United States taxes on foreign earnings until they bring those profits home. It saved them $41 billion in 2011. American corporations had amassed about $1.7 trillion in offshore profits by last year, analysts at JPMorgan Chase estimated, a figure that is now believed to be almost $2 trillion.
Mr. Obama wants to claw some of this back by imposing a minimum tax on foreign earnings.
A new coalition called LIFT America started a campaign last month to prevent that from happening. They want the United States to adopt what is called a territorial system, in which companies pay taxes on profits only in the country where they were earned, in line with the practice in many other nations.
“It is not a tax that our competitors pay when they bring profits home to their countries,” said Claire Buchan Parker, a spokeswoman for LIFT America, which includes international powerhouses like Coca-Cola and Hewlett-Packard.
Last month, the Business Roundtable, which represents mostly big businesses, started a separate lobbying campaign, called Home Court Advantage, to adopt a territorial tax system as well as a lower rate.
Another coalition, called Reforming America’s Taxes Equitably, or Rate, which includes more domestic-oriented companies like AT&T and Macy’s, is less interested in getting rid of the United States’ worldwide tax system. Instead, it is concentrating on lowering the corporate tax rate, proposing to pay for it by ending many domestic tax breaks. But it will not say yet exactly which loopholes its members would surrender to make up the lost tax revenue.
To make the numbers work, economists say, Rate’s plan would inevitably need tax revenue from the multinationals’ foreign earnings — revenue that the multinationals are eager to save for themselves, of course.
“We have different coalitions with different interests,” said Edward D. Kleinbard, former chief of staff of Congress’s Joint Committee on Taxation. “That makes it difficult for the coalitions to speak with one voice.”
In Congress, Mr. Camp, the Michigan Republican who runs the Ways and Means Committee, favors a 25 percent corporate tax rate and elimination of the worldwide system. He wants to pass a bill out of the committee this year, and Speaker John A. Boehner says he will give priority to any debate about rewriting the tax code.
“Companies have testified before the committee that they are willing to put everything on the table in tax reform,” Mr. Camp said in an e-mailed response to questions, suggesting there would indeed be enough revenue generated by closing loopholes and generally tidying up the tax code. But companies and trade groups are bombarding the committee with outside comments, underlining the difficulties of getting everyone to agree on a formula for change.
For example, the Retail Industry Leaders Association wants to eliminate all loopholes, because retailers benefit from few tax breaks. But the Chamber of Commerce and the National Association of Manufacturers are fighting to preserve many of them, including the research and development tax credit, which yielded $8.3 billion in tax savings in 2011, according to the G.A.O.
The National Association of Water Companies wants to protect the tax deduction on borrowing, another preference that saves companies billions. And a trade association for oil and gas suppliers, Western Energy Alliance, is defending tax subsidies for fossil fuels against Mr. Obama’s budget proposal to end them, potentially raising $44 billion over 10 years.
Another powerful constituency — made up of businesses that are not organized as corporations — is preparing to fight for its turf, adding to the opposition to an overhaul. After the previous tax reform in 1986, thousands of companies shifted to this status; these pass-through entities still benefit from many corporate tax breaks but often pay a lower personal rate of taxation. Their numbers have increased so much that they now account for more than half of net business profits, according to the Tax Policy Center.
They are now worried that they will be singled out to help pay for a corporate tax overhaul.
According to a study last year by the Joint Committee on Taxation, even if Congress eliminated many corporate tax deductions, it could not push the official rate below 28 percent. (At the time, Mr. Camp described the study as incomplete, and some analysts say there may be loopholes to close beyond the official list.) Still, given corporations’ opposition to getting rid of their panoply of cherished tax breaks, any rate cut could be vanishingly thin, undermining the whole point of the exercise.
Robert S. McIntyre, director of the left-leaning Citizens for Tax Justice, says he thinks most of the interest in changing the corporate tax system is actually being driven by entrepreneurial lobbyists who sense an opportunity to generate extra business from various interest groups. If any bill managed to get through Congress, he argues, it would happen only because lawmakers had ignored the prescription to keep the overhaul from losing revenue.
“They don’t care about the deficit,” he said. “They just care about their own corporate taxes.”

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INCREASING INCOME TAX THE RIGHT CHOICE FOR A SUSTAINABLE NDIS

Elizabeth Manning, The Conversation, 1 May 2013

While an income tax increase may be hard to sell to some people in the community in the lead-up to a federal election, it’s the right choice for a sustainable National Disability Insurance Scheme (NDIS).
From July 1 next year, the Medicare levy will increase by 0.5% to partly fund the NDIS, taking the Medicare levy to 2% and adding an extra $1 per day to the Medicare levy of an average worker on A$70,000.
But the move is a risk for the Gillard government because it gives the Coalition, if elected in September, the power to delay or veto the scheme.
Politics of the NDIS
Revised estimates suggesting a higher-than-expected budget deficit seem to have precipitated today’s announcement. The government has deflected discussion about the budget deficit to focus on funding of this landmark reform, which has broad community support.
This leaves the opposition in the confusing position of supporting the reform, but arguing against its implementation. With a definite funding proposal, the opposition now has to be clearer about whether it will actually support the scheme. The prime minister has issued a challenge along these lines, saying she will bring the legislation in before the election if the opposition will support it.
If the legislation is delayed, the NDIS becomes an election issue. And if the opposition gains power, Joe Hockey will be able claim a mandate for not going ahead with the scheme.
In times of budget surpluses the argument for disability support reform was often couched (unsuccessfully) in the terms that “times are good, we can afford it”. This has always been a problematic argument, as it implies that supporting people with disabilities to have choices and fully engage in their community is a luxury, not a right.
The opposition’s arguments put the NDIS back into the “luxury” basket, with the very real risk that this opportunity for meaningful and landmark reform may be lost.
Other options to fund the NDIS
The Productivity Commission’s 2011 report Disability care and support outlined a number of options to fund the NDIS.
One option was a hypothecated tax (a tax for which the proceeds are earmarked for a particular program); this was seen as an acceptable option, but not recommended on the grounds that a fully hypothecated tax could lack flexibility.
The Medicare levy is a type of hypothecated tax, but one that does not raise sufficient revenue to fully fund health care. Increasing it by 0.5% to 2% as proposed will not raise sufficient funds to fully fund the NDIS. The increase is expected to raise A$3 billion a year, which is just under 40% of the estimated A$8 billion a year cost of the NDIS.
Because this extra levy is not fully hypothecated, problems of inflexibility of funding use will not arise. However the Productivity Commission recommended against this on the grounds that increasing the Medicare levy could exacerbate any existing inefficiencies in the income tax system in the absence of other tax reforms.
The benefit of the Medicare levy is that it has broad support, as it makes the purpose of the revenue raising clear, and health care is valued. Likewise, an increase in the levy specifically to fund the NDIS could also have broad support.
An alternative option – and the one recommended by the Productivity Commission – would be directing general revenue into a (legislated) fund. This allows the option of partly (or fully) funding the NDIS through other tax reform, rather than just effectively increasing income tax.
Fight for state support
The NDIS trial is due to start in New South Wales, South Australia, Tasmania and Victoria in July, with the ACT joining a year later. The trial has been funded from consolidated revenue, with the states also contributing, after a lot of argy-bargy late last year. Western Australia and Queensland are still to sign up to the NDIS.
Under the proposed increase to the Medicare levy, Gillard has earmarked 25% of the funding pool to support states and territories to set up the scheme. This may be a political necessity, but it may dilute the advantages of a national scheme set up to ensure best practise and equitable and efficient access for all Australians. A fully national scheme will be more transparent, with corresponding incentives for good governance.
The inevitable political wrangling over which level of government should pay how much, and the likelihood that this would reduce the certainty of the scheme, was a key reason the Productivity Commission suggested that the Commonwealth should be responsible for full funding of the NDIS. This would make the scheme more secure, and funding more certain.
There is a long and sorry history in disability support of cost shifting and responsibility denial between the state and federal governments. So any joint funding and responsibility arrangements would need to be carefully legislated.
Social equity
Just under half (45%) of Australians with disabilities live in or near poverty, compared with an OECD average of 22%. So while the current debate is focused on the economic value of the NDIS, we can’t ignore the social justice and equity.
Australia also fares badly for unemployment outcomes, with just 31% of people with disabilities participating in the labour force, compared with 83% of the general population. Primary carers tend to work fewer hours than non carers, and have significantly higher rates of depressive illness.
This is a critical time for the NDIS, and public awareness and support will be crucial.
An additional levy on personal income tax, labelled as an insurance premium for the NDIS, sends a clear message about what the revenue is being raised for and that everyone is covered if need be. It spreads the costs and risks of disability. And it avoids the current situation where disproportionately high costs fall on a randomly selected group that happen to have a disability.

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GOOGLE STILL A TAX TARGET EVEN AS ITS BILL SOARS

Katie Walsh, The Australian Financial Review, 1 May 2013

• Google’s Australian tax bill has risen to $6.1 million for the year ended 2012.
• But up to $1.5 billion in search revenue will not be taxed.
Google Australia will pay nearly seven times more tax for 2012 although its $6.1 million bill still represents a fraction of the estimated $1 billion-plus in revenue it earns in Australia.
According to the US technology giant’s latest accounts, Google Australia recorded a profit of $22.4 million for the year ended December 31, 2012. This implies tax of 27.5 per cent – just short of the 30 per cent corporate rate.
The accounts show Australian revenue has soared by a third, to just under $269 million for the year ended December 31, 2012. But the accounts do not include all revenues earned from its dominant search business, which is estimated to generate between $1–$1.5 billion each year in Australia.
The new numbers will be closely scrutinised by the Gillard government, which is chasing multinationals for more tax. It is accusing some of using complex tax minimisation structures that are slashing its revenue take. The May budget is expected to reveal a deficit in the order of $12 billion.
Treasury is due to release a scoping paper this week on the problem with recommendations that could hit Google despite its hike in tax payments.
The global search engine was fingered by assistant treasurer David Bradbury in November, along with Apple, for adopting a structure known as the double Irish Dutch sandwich.
It involves routing payments through low-taxing Ireland and the Netherlands. Mr Bradbury launched Treasury’s task of getting to the bottom of the schemes and consulting with tax experts to find solutions.
At the time, Google’s 2011 accounts for its Australian operations showed a current tax liability of $781,471 despite revenues exceeding $201 million.
In 2011, it recorded a loss of $3.9 million, which largely explains the tax hike in 2012 as the business moved into the black. Google Australia’s local staff grew by almost a quarter to 750 for the year.
Much of its reported revenue is from services provided to the global entity, marketing and finding business opportunities here.
Search advertising not included
Crucially, the Australian entity does not receive income from the lucrative AdWords program, which places ads on search result pages. Last year PricewaterhouseCoopers estimated that search advertising across Australia would scoop nearly $1.3 billion for the fiscal year; Google’s share is estimated at about 95 per cent.
Google has always argued its practices are compliant with relevant laws.
Advertisers enter contracts with Google’s offshoot in Ireland, where the corporate tax rate is generally 12.5 per cent. From there, royalties are paid to a Netherlands entity which flow on to Bermuda, a tax haven.
The United Kingdom, Germany and France are among peer nations who are focusing on ways to stop the practices of multinationals, which have seen companies including Starbucks and Amazon scrutinised. In July, the OECD will present an action plan to the G20.
Apart from its scoping paper, Treasury is consulting on ways to increase transparency on tax paid by big businesses. It has tabled an option to have the Australian Taxation Office publicly release the tax data of large companies.
The Corporate Tax Association and the Tax Institute have warned it could lead to the unfair vilification of businesses. Given the complexity of tax, the numbers could be misleading, they say. The Australian Information Industry Association, whose members include Google, Apple, IBM, Microsoft and Telstra, has told Treasury that the option is “unnecessarily punitive” and would be “arguably ineffective”.
“We do not support a ‘naming and shaming’ campaign,” it writes in its submission to the review.“It is unfair and inappropriate to attack the reputation of legitimate businesses complying with Australia’s tax laws.”Particularly in the case of technology companies, the move “undermines the government’s investment in the National Broadband Network”, it says.It warns that businesses could withdraw from Australia and calls for a global response to fixing tax systems.
In February, Prime Minister Julia Gillard met with Google’s global chief financial officer Patrick Pichette, tweeting afterwards that the two “agreed that tax issues for multinationals need to be addressed through international forums”.
On Tuesday, a Senate estimates committee heard evidence relating to new laws that will give the ATO extra powers to chase tax avoidance and profit shifting. Tax experts warned that the powers were unprecedented globally.
Tony McDonald, Treasury’s principal adviser, corporate and international tax division, told the committee: “If the bill were not passed, it would have a negative impact on the bottom line.”

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ANOTHER DAY POORER, DEEPER IN DEBT

Ross Gittins, The Sydney Morning Herald, 1 May 2013

With the coming budget, spare a thought for those so poor they’re just about excluded from normal financial services, such has home content insurance or car insurance.
Don’t be too alarmed by all the talk of budget black holes and everything being on the table in Julia Gillard’s search for savings. It’s more likely we’re being softened up for a lot more budget deficits than for a horror budget in two weeks’ time.
Even so, it’s clear there will be more cuts in spending and tax concessions. And though they’re hardly likely to be draconian, you can be sure they’ll draw howls of protest from those affected, egged on by shock jocks and opposition pollies on the make.
The trouble is the cost of true necessities such as food, clothing … power tends to be a reasonable fixed amount, whatever your income.
What’s more, it’s a safe bet they’ll be aimed mainly at the better-off. So before we’re engulfed by another round of upper middle class self-pity, I thought I’d get in early and tell you a little about the lives of people who really do have difficulty making ends meet.
According to a survey conducted by the Bureau of Statistics in 2010, almost one in five Australian adults experienced ”financial stress” that year, where this means not being able to pay their bills, rent or mortgage on time or make minimum repayments on their credit cards, or they had to sell or pawn something because they needed cash.
A newly published report by Dr Nicola Brackertz, of Swinburne University, for the Salvation Army (my co-religionists), tells us a lot about the who, how and why of people suffering genuine financial stress. She surveyed 225 of the clients of the Salvos’ free financial counselling service, Moneycare, operating for 20 years.
The first thing to note is that a third of respondents were living alone and another 28 per cent were sole parents. Only 14 per cent were couples with dependent children.
Two-thirds were women. Almost 80 per cent had a government pension or benefit as their main source of income. Only 15 per cent had wages as their main income.
Almost 40 per cent of respondents were renting privately and 22 per cent were renting public or community housing. Only 21 per cent were paying a mortgage and just 5 per cent owned their homes outright.
Put all this together and it tells me we’re dealing with people right at the bottom of the heap. Most of the respondents would be unemployed, on the disability support pension or sole parents (many of whom have been relegated to the dole by a caring government).
Since the great majority of age pensioners own their homes, we’re dealing in the main with only those age pensioners living alone and renting. It all goes to show how close people on the dole live to the poverty line, the more so if they have to rent privately.
With rents as they are, it’s no surprise people in privately rented accommodation on a very low income are highly likely to experience financial stress. The surprise is the disproportionate number of respondents living in public housing.
The rent these people pay is generally set at 25 per cent of their income, no matter how low that income is. This sounds pretty generous; the standard measure of housing stress is rent or mortgage payments exceeding 30 per cent of income.
The trouble is the cost of true necessities such as food, clothing and power tends to be a reasonably fixed amount, whatever your income. So if your income is very low, you may not be left with enough for spending 25 per cent of the total on rent to be easily manageable. By the same token, if your income is quite high, a lifestyle choice to devote a lot more than 30 per cent of it to housing doesn’t leave you feeling the pinch.
If you’re as comfortably off as I am, it’s a surprise to discover how small were the total debts that got the respondents into trouble with their creditors. Although a third had debts of more than $20,000, the typical (median) debt level was $5000 to $10,000.
Almost half had three or more sources of debt, with the most common being utility bills, credit cards, phone bills and personal loans. Well over half the respondents had been experiencing financial difficulties for two years or more.
Why did the respondents get into financial trouble? In their own words, ”the leading causes were insufficient income caused by retrenchment, unemployment or underemployment and an insufficient level of government allowances and pensions”, the report says.
”Health reasons, including disability and mental illness, often prevented respondents from earning sufficient income.” It’s easy for you and me to tell ourselves these people are just bad money-managers. But American research I’ve been reading says they’re no better or worse managers than the rest of us. Their real problem is that life at the bottom is so much more unforgiving.
When your income’s so low you need all of it just to get by, there’s no scope to build a buffer of savings to cover you when quarterly utility bills arrive or some unexpected expense arrives. And when you can’t afford car insurance or home contents insurance, big unexpected expenses are more likely to arrive.
When some service is cut off because you haven’t paid the bill, you can’t get it back on until you’ve paid the arrears and a reconnection fee. When you borrow to tide yourself over, you pay much higher interest rates than the rest of us – including to ”payday lenders” and pawnbrokers.
If none of this applies to you, count your blessings (as we used to sing in Sunday school).

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MEDICARE RISE TO FUND DISABILITY SCHEME

Phillip Coorey, The Australian Financial Review, 30 April 2013

The federal government has settled on a $3.2 billion, 0.5 percentage point increase to the Medicare levy to help fund its National Disability Insurance Scheme and is expected to make an announcement on Wednesday.
The Australian Financial Review understands the government’s expenditure review committee, and then cabinet, considered several options on Monday, including an increased Medicare levy, a separate NDIS levy and a straightforward incremental increase to marginal income tax rates.
Sources on Tuesday said the favoured option was to increase the 1.5 per cent Medicare levy to 2 per cent.
Based on present numbers, the increase would raise $3.2 billion a year, or about 40 per cent of the estimated $8 billion in extra annual funding the NDIS would require by the end of the decade when it is fully operational.
A 0.5 percentage point increase would mean an extra $750 a year for someone on an income of $150,000.
The remainder of the extra $8 billion will be found by structural savings to the budget, including cuts to the disability support pension. Industry speculation was rife that Prime Minister Julia Gillard would make the announcement in Melbourne on Wednesday.
Pre-election brawl with opposition
Any tax increase will spark an immediate pre-election brawl with the federal opposition, which on Tuesday reiterated its support for an NDIS but not a new tax to fund it. Opposition Leader Tony Abbott said a Coalition government intended to fund the scheme from consolidated revenue.
But the government is expected to legislate the tax increase before the September 14 election and introduce it on July 1, 2014, forcing the opposition to go to the election promising repeal it if it wins government. This timetable is despite the fact that the increased funding raised by the tax increase is not strictly needed until the 2017-18 financial year, after the expiration of the three-year NDIS trial period, funded in last year’s budget with $1 billion.
Speaking during his annual charity bicycle ride, Pollie Pedal, which is ¬raising money for Carers Australia, Mr Abbott said a strong economy, not a new tax, was needed to “make the NDIS a reality’’.
“With a strong economy, we can ensure that government revenues are in a position to sustain over the long term an NDIS,’’ he said. It was “just not good enough’’ that the government was contemplating a tax rise.
“Now the government is coming after you, the people, for more money, because it can’t get its finances under control,’’ Mr Abbott said.
The existing 1.5 per cent Medicare levy is budgeted to raise $9.7 billion this financial year.
Most people pay the full 1.5 per cent. Those earning below $19,404 do not pay the levy and those earning up to $22,828 pay only some of the levy.
Take a Labor approach: PM
Seniors and pensioners generally have to earn more than $30,000 before they start paying the levy and do not pay the full levy until their earnings hit about $36,000.
Figures released by the Australian Taxation Office on Tuesday show 8.6 million people paid $8.6 billion in Medicare levies in 2010-11.
On Monday, when flagging the levy and other budget cuts, Ms Gillard indicated the thresholds would apply to any NDIS-related increase and those on higher incomes would bear the brunt.
“We will take a Labor approach to the burden sharing that I have described,’’ she said.
“A Labor approach which understands that people come with different capacities to the task, but also a Labor approach that understands that if we look right across our society and ask everyone to make some contribution, then it lightens the load for everyone.’’
The government fell largely silent on Tuesday, hoping disability support groups would drive public support for the pre-election tax increase.
But with the political parties divided over funding, the disability support community, which wants the NDIS delivered by whoever is in power, was also split.
People with Disability Australia spokesman Craig Wallace supported a levy as the best way to give long-term security to disabled people.
Even partial levy important
“The fact is we’re heading into a really tight fiscal environment,” he said.
“What a levy does is provide a sustainable way to pay for reform.”
Mr Wallace said even a partial levy, such as that to be announced on Wednesday, was important to provide a guaranteed funding base.
But former NSW Labor minister, John Della Bosca, now the national campaign director for NDIS advocacy group Every Australian Counts, said the funding decision was one for government and his group was agnostic on the issue. But he said a properly and securely funded scheme would save everyone money over the long term.
Australian Lawyers Alliance president, Tony Kerin, supported a levy and believed most Australians would be prepared to fund the NDIS either through a levy or an increased GST.
Ms Gillard flatly ruled out touching the goods and services tax on Monday.
Finance Minister Penny Wong furthered the case for a hypothecated levy, saying: “You have to look at what will give security to people with a disability, what will ensure a strong scheme, not just for a couple of years but for the decades ahead.’’
A 2 per cent Medicare levy effectively increases marginal tax rates by the same amount, giving Australia a top tax rate of 47 per cent and a bottom rate of 21 per cent.
Newman offer rejected
Such increases will be a significant departure from Labor’s now-discarded 2007 election “aspiration’’ to reduce and refine tax rates from four to three.
Back then, it said that by 2013, if affordable, it would reduce the tax rates to 15, 30 and 40 per cent. The 30 per cent rate would apply to incomes between $37,000 and $180,000.
In July last year, the premiers, in Canberra for a Council of Australian Governments meeting, offered to back Ms Gillard unconditionally and on a bipartisan basis if she imposed a levy for the NDIS.
But she rejected the offer led by Queensland Premier Campbell Newman, fearing a scare campaign from Mr Abbott about a “great big new tax”.
“We will make the appropriate arrangements out of the Commonwealth’s budget without a new tax, income tax, to fund the National Disability Insurance Scheme,’’ she said at the time.
Former Liberal treasurer Peter Costello told the ABC’s 7.30 program on Tuesday both sides of politics should be shelving new spending promises because of the budget situation. This included the NDIS.
“I wouldn’t be introducing it in this form at this time,’’ he said. “The budget’s in deficit. To fund it, you’ll have to borrow more money.’’
South Australian Labor Premier Jay Weatherill, one of the first premiers to sign up to the NDIS, said it was up to the federal government how it funded its share.
The total cost of the NDIS is expected to be about $15 billion a year when it is fully operational. Of this, $8 billion is new money while the other $7 billion is the current annual contribution of the states and the Commonwealth towards disability services.
The states will hand over the money and the sole funding responsibility to Canberra.

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FATCA SETS STAGE FOR EU CLAMP DOWN ON TAX EVASION

William Amofah, CFO Insight, 29 April 2013

The enactment of FATCA has ramped up negotiations at the EU and OECD level on how to improve the implementation of taxing cross-border investment income.
FATCA paves the way for international clamp down on tax havens and tax evasion.
The attention paid to the elimination of tax havens by policymakers and the media has increased in recent times. One of the main reasons for this, according to Deutsche Bank Research, is the implementation of FATCA by the United States.
The law, passed in 2010, is aimed at foiling tax evasion by US citizens. Faced with the threat of being sanctioned with a 30% withholding tax, banks are now being squeezed by authorities to provide information about accounts outside of the US held by American citizens. The law, however, has not been well received by the public. Last year, Herman B. Bouma, a lawyer at Buchanan Ingersoll & Rooney PC, described the law as “sheer idiocy.”
Nevertheless, the legislation has spurred negotiations at the EU and OECD levels on how to improve the taxation of cross-border investment income. At the European level this includes the expansion of the Savings Taxation Directive – an agreement between EU member states to automatically exchange information with each other about customers who earn income abroad.
The dire fiscal outlook in many countries in the euro zone means that more than ever, governments are looking for ways boost tax revenues. Earlier this month, Germany, France, Italy, Spain and the UK seized on the FATCA agreement as a way to speed up the implementation of an improving the exchange of information for tax purposes within the EU.
That governments want to clamp down on tax evasion is nothing new: since the mid-1990’s the topic has been one of the long-term objectives of the OECD. However, the passing the FATCA legislation, should increase the initiatives designed to advance the exchange of tax information.

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