THIS week’s Federal Court decision on Kerry Packer’s tax has caused justifiable outrage. There is more.
In 1996, Kerry Packer and his son James made a great issue of the need to build a great Australian media company.
“”What we are talking about here is the preservation of national identity and pride. Forceful, quality, internally competitive companies can reap enormous benefits for the economy,” said James.
They were responding to the Government’s issues paper on media ownership (itself a pitiful non-core response to the Coalition’s pre-election promise of “”a comprehensive public review” of cross-media-ownership).
That promise, remember, resulted in Packer’s public endorsement of John Howard’s prime ministerial ambitions.
It took Howard a painful time to deliver. The issues paper went out in October, 1996. The typically self-serving responses came back from all the usual suspects, including the Packer submission that the cross-media rules which prevented him getting control of Fairfax should be abandoned.
Packer thought, however, that the rules on foreign ownership should remain, so Rupert Murdoch (an American citizen) could not take over the Seven Network.
Howard publicly saw merit in the Packer call for a big Australian media company.
He said, “”If you are to have a presence in the region and a presence around the world, if you are to have a company that can be, in a sense, a flag-waver of Australia, then you need a very, very strong domestic base.” That was the day before Anzac Day last <>< DROP-LEG >year. The day before the flag waving.
But Howard under-estimated the savaging he would get from the Murdoch press in the ensuing days. An editorial in The Australian said, “”PM fails media challenge” and a news headline “”Anxiety highlights Howard’s failure”. Murdoch’s Telegraph had headline “”Leadership — John Howard’s crucial failing”. Etc.
Howard backed off, courageously postponing any change to the media-ownership rules. They were postponed again in September. Only in March this year did Howard put off all changes indefinitely.
That should have got Packer off-side. Not so. That was precisely the same time that <>< DROP-LEG >the digital television decision was announced, handing to the existing free-to-air commercial networks, including Packer’s Nine, a huge amount of newly created spectrum until 2008 for absolutely nothing. (All Labor did was water that down to 2006 in the Senate.) Howard, the great proponent of competition, ruled out any thought of a public auction for the extra spectrum, instead buying the fatuous argument that the existing networks needed protection to pay the huge cost of moving to digital. What other industry gets such protection and subsidy to cope with new technology? After that freebie, Howard got Packer’s endorsement for this election.
That endorsement would <>< DROP-LEG >have been a poisoned chalice if this week’s judgment had come down before the election. It could have cost Howard the election. Howard’s great adventure in tax reform would be missing the soundtrack. What about his rich mates who pay no tax? What about the promised fairness? In saying that, I don’t criticise the judge, Justice Graham Hill. Indeed, he could not possibly have brought the judgment down any earlier. The hearing was held from September 21 to 28. Two weeks later the judge had synthetised the huge amount of argument and evidence and produced a 10,000-word judgment.
Hill puts the blame rightly on bad drafting.
<>< DROP-LEG >Howard, of course, gave Packer more than free digital spectrum in lieu of Fairfax. he gave a weak approach to tax avoidance.
Howard’s great tax adventure came in the form of a tax package, no part of which would be changed. The theory was that if Howard won the election he would have a mandate for the whole package. Too much attention has been paid on what was in the package, rather than what was left out. Howard said he would leave the question of business taxes alone. So no reform of business tax went into the tax adventure. If that reform had gone in, it would have had to have some anti-avoidance measures which would then have been <>< DROP-LEG >stamped by the people. Instead we have nothing.
Labor legislated to hit the avoidance method using foreign companies at the core of this week’s case in 1987 and 1989, but the case shows it was not effective. None the less the fact that Labor with Keating as Treasurer did so may have been one of the causes of Packer being dirty with Keating, in addition to Keating being the architect of the media policy which allowed princes of print and queens of the screen — the policy that precluded Packer getting Fairfax.
Under the avoidance method the Australian company borrows money at high interest from a foreign company that it controls. The interest <>is tax deductible in Australia. The foreign company earns the interest as income and pays tax on it at a very low rate in the foreign tax shelter. In Packers case the companies were in the Bahamas and the British Virgin Islands. The foreign company eventually repatriates the money to the Australian company as capital.
Labor said in press statements in 1987 and 1989 it would abolish the tax deductions for interest paid to controlled foreign companies. And it would deem the earnings of foreign controlled companies not engaged in real business as income in the Australian company’s hands. But when it legislated the drafting failed. As the judge said, it resulted in “”mind-numbing complexity” that revels in obscurity. Packer merely overlaid two foreign companies so where the legislation described a transaction between an Australian company and a foreign one, it was in fact between two foreign ones. It was help by some other complex transactions.
The core point is that the judge understood what was needed from the press statement, but the actual law did not do the job. Perhaps they should have just made the press statement the law. Seriously. The judge indicated a willingness to enforce the meaning of plain-English law. A plain-English tax Act might now work, whereas it was impossible in the days of the black-letter courts of Barwick’s day.
Another issue arises. Packer called for the retention of foreign-ownership controls on the media. Should an organisation that relies so heavily on foreign companies be able to have a broadcasting licence under a regime that wants to reduce foreign ownership? Should anyone listen to an organisation that calls for a big Australian media company when it pays so little Australian tax and uses foreign companies to avoid it? “”National identity and pride”. Pah.