Tackling tax leaners needed before GST change


In his maiden press conference as treasurer, Scott Morrison dexterously managed to avoid, not one but, two elephants in the room.

The first was the political elephant: his role in the demise of Tony Abbott. The first question from reporters concerning this elephant was deftly palmed off as a thing of the past.

It was the three-lettered policy elephant however which was sublimely sidestepped by Morrison and the finance minister Mathias Cormann at his side: the rampaging elephant which is the GST.

New Federal Treasurer Scott Morrison meets with Reserve Bank Governor Glenn Stevens. Photo: Peter Rae

Morrison kicked off proceedings by denying a story in Fairfax Media that the government was junking the tax reform white paper.

“The tax white paper process of course will continue,” he said in response to a question about a white paper. The tax reform “green paper” – that is the initial document on policy settings – was due to have been released in seven weeks.

Now, though, it may take longer, conceded Morrison.

“It will be released when we are in a position to release it.”

Whether green paper or white paper, things have changed.

As keen as he and new Prime Minister Malcolm Turnbull are to avert a policy storm – a backlash from powerful vested interests who were counting on a hike in the GST as the glittering centrepiece of any tax reform – things have changed.

Though the Abbott and Hockey regime had insisted “everything is on the table” when it came to tax reform, “everything” had soon become known as code for GST.

Some $50 billion in superannuation concessions, concessions which overwhelmingly favour the rich, were no longer on the table.

Negative gearing flickered as a dim, meanly-lit candle on the table of tax reform for a while, but was soon snuffed. Too hard. So too, significant transparency measures for large corporations.

Most of the A-team either have trusts or have plenty of close friends who have one, so these were never on the table, let alone in the same room as the table.

Once the likes of the banking lobby, the property lobby, the big business lobby and the corporate tax lobby had strutted their stuff, the only thing of substance which really appeared to be firmly “on the table” was GST.

So it was that the white paper was expected to deliver the analytical framework – the licence, if you like – for the government to hike the GST. There would be some tinkering at the edges elsewhere, but this was the guts of it.

An effective tax

The GST is an effective tax, there is no doubt. It catches sales, rather than profits. Corporations and small businesses alike can whittle profits down to almost nothing. No profit made, no tax to be paid.

GST, on the other hand, is easy and effective to implement and it is loved by Australia’s most powerful vested interests. But it lacks one crucial element: public support. In this, it is a political nightmare to implement.

It is the public which pays the GST – not banks, not big business – and it hits the poor harder because, proportionately, it rips out a larger slice of their disposable income.

This is the conundrum which Turnbull and Morrison face. Turnbull is an independent thinker, unlike his predecessor, and less likely to be swayed by the sophistry of lobbyists. He is known privately to be concerned at the excessive generosity of, for instance, superannuation concessions, and also of widespread tax avoidance by multinational companies.

And in the past few years, public sentiment has changed. There is a broad awareness of tax fairness, that the “lifters” are ordinary taxpayers and many of the “leaners” are those who can most afford to pay yet proportionately pay the least. Tax fairness has come to the fore as an issue of public interest.

Politically then, it will be hard for the government to pull off a rise in GST without doing more to capture a decent whack of income tax from multinationals and wealthy superannuants.

Justifiably, the “lifters” will cry foul if they are hit with higher taxes when the likes of Google, eBay, Apple, big pharma, oil and gas majors Chevron and Shell, News Corp, Australia’s largest bookmaker William Hill, American Express and a host of other “leaners” fail to pay their fair share and the authorities fail to do anything about it.

It is true that the government has bowed to public pressure and begun its reforms, even before the white paper, but as yet these lie more in the realm of rhetoric than reality.

The Opposition too has handed down its multinational tax policy, fully costed, unlike the government’s – though, like the government’s, it is still far too light and fluffy.

Yes, emissaries from the Tax Office have been sent into the biggest multinational avoiders and there has been some legislative tightening.

Fairfax Media has spoken with a number of sources about the measures and there is much, much more to be done.

The former head of withholding tax at the Australian Tax Office (ATO), Martin Lock, has reviewed the proposed amendments to the legislation and found the bill “does nothing to tackle profit-shifting by Australian headquartered companies, or by Australian subsidiaries and branches of foreign companies”.

The introductory parts of the Explanatory Memorandum carries plenty of hype says Lock but the proof of the effectiveness of this bill will be in its execution.

“This Bill will ensure that multinationals … (pay more tax),” says the memorandum .

“No it won’t,” says Lock.

The ‘awkward and difficult path’

“The new law won’t actually make foreign companies taxable on profits they make from selling to Australian customers directly rather than through an Australian subsidiary or Australian branch. Instead, the proposed law goes the awkward and difficult path of taxing the foreign company only if it gets a tax benefit that the (Tax) Commissioner can identify; only if he can prove that one of the principal purposes of the sale being made the way it was, was to avoid Australian or foreign tax; and only if the foreign company was assisted by a related company in Australia in making the sale to the Australian customer,” he says.

There are a lot of “if’s”. The Tax Commissioner’s task will be very resource-intensive, made all the harder by the fact that he has no legal power to compel these foreign companies or their overseas directors or staff to hand over much of information he’d be needing to prove his case, or compel them to pay up the tax if and when he levies it against them.

“The new law is an add-on to the fraught and mostly unsuccessful general anti-avoidance legislation.”

Tearing up or re-writing tax treaties to get rid of archaic source and residency rules is really the only effective way of taxing these offshore sales. The current approach is a poor, indirect, cost-intensive and uncertain compromise.

This is precisely how the corporate tax lobby likes it. “Let’s wait for the OECD negotiations to play out”, is their mantra, knowing full well that multilateral tax talks are highly unlikely to have success, given the diversity of national interests at stake.

The task therefore is enormous. The upside is that the new leadership is probably more up to the task than the old. Given the enormity of the task however, and the enormity of vested interests who will seek to derail any meaningful reform at every possible juncture, now is hardly the time to be hastening forth with public declarations of a new white paper, as critically needed as it may be.

So it is that the advent of the white paper seems like it has been delayed. It needs to be reset. If the GST is the centrepiece rather than one major element of a broader and deeper reform package it will be hard to sell.