OK … the certainties are death and taxes … Right, that’s fine. But, at least there is some discretion over taxes. Who knew that it is quite an interesting subject. The rate which a country levels it’s business tax can have a profound effect on it’s economy.
Slack Investor is in Ireland at the moment and, cant help reflecting on the role of tax incentives and the incredible effect on the Irish economy of the establishment of a Special Economic Zone in Dublin in 1987.
The transformation was accelerated when Ireland’s standard corporate tax rate was reduced from 40% to 12.5% (phased in from 1996 to 2003) – wikipedia.org
It should be noted that Australia’s corporate tax rate is 30% and, in the US, 21%. Because of the Ireland tax changes, this made Ireland a ‘Tax Haven’ and a wave of international companies set up entities in Ireland. These include Apple, Alphabet, Facebook, Microsoft, Oracle & Pfizer.
Multinationals move $16bn from Australia to tax havens each year – From theguardian.com
There are all sorts of complicated tax minimization strategies with exotic names such as the Bottom of the Harbour, the Double Irish, the Dutch Sandwich, etc. Tax authorities are always trying to shut these down, but fighting a tough uphill battle.
The simplest way that multinationals minimize tax is to shift profits from a high corporate tax country to a low taxing country. This is usually done by charging the Australian branch exorbitant licensing or management fees from the parent company.
Microsoft, which took $6.3 billion from Australian customers during fiscal 2021-22, told the ATO that 93.6 per cent of that was not taxable (due to shifting profits to Ireland!) – ultimately paying just $120.28 million, for an effective tax rate of 1.9 per cent of gross profits. – From Information Age
Australia is attempting to fight back with new Tax Transparency Laws that will make companies disclose their transactions on a country basis. There is also an Australian/OECD push to enforce a 15% global minimum tax in the countries where revenue is earned.
Slack Investor applauds these efforts but, the multinational accountants are cunning bastards!
The Tax Mix
The image below shows, on a country basis, what the percentage of total tax receipts can be attributed to Personal/Individual Income, (Dark Blue), Corporate Income (Green), Social Insurance Taxes (Gold), Property Taxes (Light Blue), Consumption Taxes (Black), and Other (Brown).
It is clear that, if Australia wishes a tax structure closer to the OECD average, it has to reduce Personal and Corporate Tax and increase Social Insurance taxes (these taxes are specific to a future benefit (e,g. Pension, Disability, etc). Also, in order to make our tax system more sustainable, a priority must be to increase consumption taxes from the relatively low rate of 10%.
Both major parties must work together to achieve tax reform. I sincerely hope that this can happen. But, it will take a group of politicians with a long term view. Good luck with that!
Australian Super – Division 296 revisited
While on the subject of tax, Slack Investor will have one last rip on the proposed new superannuation tax. There has been lots of media about the Australian government proposed, seemingly inevitable, new super tax. On the legislative agenda is a Division 296 tax on superannuation balances over $3m. Slack Investor has already had a spray about this. Slack Investor knows that there is a need to tax those with big super balances.
There should be incentives to provide for your own retirement but agrees with the government that, once you have enough money to fund your retirement that, all concessions must taper off. Slack Investor objects to the design of the proposed tax, it is to be applied to unrealized gains and the caps are to be not indexed.
There is already an indexed cap on the tax-free Pension accounts of $2m (2025). In the eyes of Slack Investor, this amount is plenty for a comfortable retirement. If your pension fund earns just 5%, this is an annual income of $100K. Any extra super can go in your Accumulation account which is currently taxed concessionally at 15%.
The problem is, that there are some super accounts with huge balances that are taking advantage of this government generosity.
The 2020-2021 data reveals the number of Australians with super balances over $50 million has increased to 135 people – From ABC News.
A Better Way
How about we forget about this silly unrealized gain business and we keep the current $2m (indexed) restrictions in place for the pension accounts to provide for a good retirement income. To raise revenue, the government should introduce higher taxes on any actual gains in super balances left over in the Accumulation account for super balances over $3m (Indexed). These taxes could be between 15% and 30%.
This would raise some money without the complications of unrealized gains. Everyone should be happy!
