I got my first inkling of tax avoidance at the tender age of 17 when I started at the ANU.
I was outraged to discover that I, one of six children of an Anglican Minister, got an annual Commonwealth scholarship living allowance of a paltry $600, yet a friend of mine, son of a Daimler-driving tobacco farmer, got the full allowance of $1000.
The allowance, of course, was means tested according to parental taxable income. Farmers in those days got huge tax deductions, bounties and other goodies from a conservative government full of farmers.
Not much changes.
Last week Amanda Vanstone was arguing the same thing can still happen with Austudy, even though she exaggerated by picking a hypothetical example and like Ronald Reagan confused it with reality.
And the tax advantages of the rich continue.
Some members of Coalition Governments treat them as a natural part of life and cannot imagine anyone dealing with their finances any other way.
When Malcolm Fraser planned to slap the highest tax rate on children’s income after being prodded about tax avoidance, he and his Cabinet were oblivious of the kids with milk runs and paper rounds who contributed to Mum’s shopping money.
And this week, Industry Minister John Moore, looking across at Labor Members while illustrating a point, said, “”Presumably you hold life insurance policies, presumably you have superannuation policies, presumably you own unit trusts, presumably you invest in some corporations . . . ”.
Wrong, wrong, wrong.
The vast majority of Australians who get their head above water after paying the mortgage can only think about putting money in the bank where it is ripe for picking by the taxman.
Wages and money in the bank get horribly slugged by tax whereas shares and trusts are treated generously and can be tax avoidance mechanisms.
The astounding thing is that Mr Moore had the temerity to accuse those without such investments as “”public-sector bludgers”.
But who’s bludging on the tax?
Maybe, some good can come out of this ministerial share fiasco. If the ministers are forced to divest or put their money into blind trusts, they might see some of the gross unfairness of the present saving and tax regime in Australia and do something about it.
Many ministers have family trusts and through them, or directly, have shares in companies. There is nothing wrong with that. It is good to invest in Australia’s future, especially in companies that create wealth.
However, tax treatment of savings through shares has been treated far more generously than the bank-deposit savings of and middle-income people.
Middle income people do not invest much in shares because of the risk and because of up-front brokerage and stamp-duty fees. The brokerage percentage is usually higher for smaller parcels of shares. To minimise risk you need shares in a range of, say, 10 companies and you need about $5000 in each if you are to avoid excessive brokerage. Otherwise low-income earners are exposed to having all their eggs in one basket.
So they put their money in the bank, which is a complete mug’s game.
With shares, the dividends are not taxed as heavily as the interest on money in the bank. Dividends are usually franked (or credited with company tax already paid), so they are usually taxed at around 15 per cent, whereas interest is taxed at around 48 per cent.
The capital gains are treated differently as well. Capital gains on shares are taxed only after they are sold and only after allowing for inflation. They can also be offset against earlier capital losses. But the Tax Office makes no allowance for inflation eroding the value of money in the bank. It is not regarded as capital loss.
Typically, $1000 in the bank erodes 4 per cent by inflation and gains 7 per cent interest. But the 7 per cent is taxed by about a half, so the money-in-the-bank saver in fact goes backwards.
The idea of franking dividends is superficially fair. Why should I pay tax on dividends after the company has already paid tax on that profit? But the same logic can be applied to a casual domestic gardener or cleaner. Why should my gardener or cleaner pay tax on money that I have already paid tax on?
Overall, shares favour those on high incomes who can afford the risk and can afford a large enough holding to spread the risk.
Family trusts, which many ministers have, can be used as a tax-avoidance mechanism. One way is through income spreading among family members so that instead of one taxpayer getting all the income and paying the highest marginal rate on a very high proportion of it, the income is spread among as many family members as possible so all can get the advantage of the tax-free threshold and the thresholds below the highest marginal rate. Typically, $100,000 earned by one person will attract $40,000 in tax. Spread among three people it will attract $20,000 in tax.
The rule against children’s “”unearned” income can be circumvented in small businesses very easily, by giving them paid work and stretching the pay up and the work down.
Family trusts also enable high-income earners to spread income into different years to reduce tax. The trust pays higher amounts in years when other income is low and lower amount when income is high. There are rules to prevent some of this by penalising undistributed profit, but they are not foolproof.
Trust arrangements will add to ordinary business arrangements for people wanting to avoided the superannuation surcharge. Typically, an average income of $100,000 over two years will be paid as $69,999 one year and $130,001 the next and double the usual super will be paid in the $69,999 year and none in the $130,001 year. These things can be done in businesses where the owner’s draw-down occurs on June 30. Too bad for the wage slaves.
The mere threat of ministers losing their family trusts or having to convert their shares to cash might prompt them to make tax and savings arrangements fairer.
Sure, we don’t want politics restricted to the assesstless and talentless. But we would like to see some fairness. There are two prongs to that. One is to treat cash savings better (allowing a tax break for at least the effect of inflation, or better to allow interest to accrue without tax).
The second prong is to get more ordinary Australians into shares to build up the wealth generating capacity of the country.
It has also been excellent to see in the past five years that computerisation has made very large share registries of lots of small shareholders more attractive. So we have had lots of mums and dads shareholdings in companies like the Commonwealth Bank, Woolworths and National Mutual. But these only happened at float time and they and other floats carried the ulterior motives of attracting strong customer support or support for demutualisation rather than the needed to get capital or give ordinary people a chance to invest in capital markets.
Technology, law and tax systems need to be directed to attracting more small holdings. It would help the national saving and help prevent the rise in national debt and the selling off of Australian assets to foreigners.
As things stand, though, Mr Moore can presume that the vast majority of people will pay off the mortgage and put money into the home because putting it in the bank is for mugs and the system is not suited to putting small amounts of money in the sharemarket.