Prime Minister Paul Keating has blown the chance of recouping $800 million into the public purse by his election campaign announcement about tax fraud, according to senior Tax Office sources.
The sources suggest that Mr Keating abandoned the standard way of dealing with tax avoidance for political advantage.
They likened it to announcing in February that you have found a warehouse full of stolen goods and that you would be raiding the warehouse sometime after March 2. Of course, the goods will be gone.
Mr Keating announced on February 11 that about $800 million in tax a year was being avoided through complex trusts, and that this money would now be available for election promises. He said that he had only been given the advice about the extent of avoidance in January.
The Opposition responded sarcastically that this was convenient timing and asked why the avoidance had not been cleaned up earlier.
In fact, the extent of avoidance only become known late last year. The tax office had only just begun to get the fruits of new software called NetMap. An earlier version of the software was used in the Belanglo State Forest back-packer murder investigation. It is capable of examining a vast array of seemingly unconnected data to find connections and patterns.
The tax-avoidance schemes involved extensive arrays of trusts. Each individual trust puts in a tax return which on its face seems legitimate and isolated. However, when the new software traced the links through the arrays of trusts, it found common sourcing to wealthy individuals. The trusts disguised income as capital and profits as loans.
Tax sources say that the normal pattern for dealing with avoidance is to get to an advanced stage of uncovering it and then for the Government announce action in the form of legislation that would take effect from the date of the announcement.
This was not done in this case because the Government was in a caretaker mode and could not make policy or legislative commitments. They suggest the proper course would have been to go to the Opposition and have a joint approach to close the loophole.
The sources said that in any event, the announcement might have been premature. More work was needed to ensure the avoiders were trapped. They thought that from the moment of the announcement, the owners of the trusts would start unwinding them, and there was some evidence that this was happening.
If the matter had been dealt with in the usual way, the noose would have been tightened first, the announcement made with provision for retrospectivity, and the money sitting in the trusts would have been exposed and available to be taxed. As it is that opportunity is now lost.
Commentators at the time suggested that the avoiders would just find another method of avoidance, but the tax sources go further. They say that the announcement was a fore-warning and that without legislation from the date of the announcement, the tax could be permanently lost.
Mr Keating’s February 11 announcement contrasts with the announcement of the then Treasurer John Dawkins on December 2, 1993 … not in a caretaker period.
He made public an avoidance scheme involving life-insurance companies that would cost the revenue $3.9 billion and said on the same day and that the legislation would be retrospective. Other tax changes have also been announced with the changes to take place from the date of the announcement.
Last December’s Innovation Statement, for example, announced that pre-1993-94 research-and-development claims were guillotined as at the date of the statement.
In his 1993 announcement, Mr Dawkins said the Government “”would use retrospective legislation to correct such defects in the tax law if other situations like this arise in the future”.
Another situation did arise (this one), but the caretaker period prevented the legislative guarantee to capture the tax.
The tax sources said an enormous amount of work had gone into the investigation of the trusts and they were outraged that the premature announcement by Mr Keating without legislative backing had compromised the chance of the investigation recouping the tax.
The sophisticated information-technology element turns the investigation into a challenge and hunt for investigators, almost like a computer game. One suggested that Mr Keating’s actions were like knowing the winner of the Melbourne Cup and broadcasting it to the world, instead of remaining quiet until you could make a killing.
Some Tax Office legal people say that all trusts should be treated exactly like companies for tax purposes and that charities would get a direct rebate of the tax. Present law is weak because it allows some trusts in some circumstances to retain profits or convert them to capital. That capital is leaked out in non-taxable forms. The trusts can reduce income so comprehensively that people obtaining hundreds of thousands of dollars have an official income low enough for them to claim various social security allowances.
Many of the trusts are either set up overseas or send money overseas … particulary New Zealand … and are often disguised as charitable trusts.