The property lobby has come out swinging at reports in the Sydney Morning Herald and The Age newspapers alleging Australia’s listed property companies are paying less than their fair share of tax.
“Completely untrue!” cried the press release from the Property Council of Australia.
On the contrary, it is completely true. The newspaper reports did not “allege” that property trusts paid less than their fair share of tax; they made a bald statement of fact: property trusts pay little or no tax.
The question is; do their investors pay tax? As recognised in both the press reports and the annual Tax Justice Network study on which they were based, trusts are “flow-through” vehicles whose investors are required to pay the tax.
And those investors – who receive the distributions from a trust and are meant to pay the tax – have all sorts of tax arrangements whether they are a person, another trust, a self-managed super fund or a special purpose vehicle in the Cayman Islands.
If they are in the latter class – a tax haven – they would be paying far closer to zero than the 30 per cent company rate in Australia; likewise if they are another trust.
So it is that the nation owes the Property Council a debt of gratitude. For, in objecting so rancorously to an unequivocal gathering of facts, it has now drawn attention to the privileged tax status enjoyed by its members. That is, the “somebody else can pay the tax if they get around to it” privilege.
If the Property Council was truly desirous of bringing a meaningful contribution to the tax debate, it could start by furnishing the tax rates of major REIT (real estate investment trust) unit-holders. GPT’s top holders, for instance; the Singapore government, foreign fund managers Blackrock and Vanguard inter alia.
Or it could inquire as to the identities of those large investors lurking behind the nominee companies on the share registers of members such as Westfield (Scentre Group), Dexus, Goodman Group, Stockland and Mirvac.
In the style of the fellow peak body the Minerals Council, and its penchant for conflating taxes with royalties, Property Council chief Ken Morrison prefers to focus on other things which had been hitherto absent from the debate such as stamp duty. And even GST.
“The property industry is actually the nation’s single largest tax payer, contributing $34 billion in real estate specific taxes in 2013. That’s before you count the corporate tax and GST the industry pays,” the Property Council said.
Que? Hadn’t the Property Council heard that its members tend to pass GST on to consumers?
The Tax Justice Network found nearly one third of the ASX Top 200 paid an effective tax rate of 10 per cent or less, well below the 30 per cent statutory rate (that’s corporate income tax not, ahem, GST).
The inclusion of REITs did drag this overall rate down dramatically.
“The prevalent use of trusts and stapled-securities in the real estate sector has meant that the 17 real estate companies listed in the ASX 200 annually pay on average just $283 million in tax, while generating profits of more than $6 billion,” it said.
Given the flow-through nature of trusts, it was probably unnecessary of the Tax Justice Network to deduce: “If the statutory rate of 30 per cent is applied to the sector’s profits, we estimate an average $1.5 billion in annual tax revenue forgone.”
Still, the major points of the report remain valid and it is London to a brick that REIT investors pay closer to 10 per cent than 30 per cent; ergo, a humungous leakage of corporate tax.
The result, as with any tax avoidance, is others in the economy – businesses and individuals – are forced to pick up the slack.
Industry groups such as the Property Council are quick to quote total tax dollars paid by their members but are more reticent when it comes to discussing effective tax rates. Tax ‘fairness’ however is ultimately a question of effective tax rates not of total tax dollars paid.
When asked about effective tax rates industry spokespeople invariably give the answer that their members comply with the tax laws and that they pay the required amount of tax.
If they do comply, yet in so doing pay 10 per cent, or less, of their accounting income in tax, then the broader question is how fair are tax rules which allow such a result?
One former top officer at the Australian Tax Office says this is where the real debate needs to take place. “Imagine the howls of protest from business if the corporate tax rate were set at 30 per cent of reported accounting income not taxable income?
“It’s a question for governments past and present. Are the tax rules fair if they allow a company to so reduce its ‘taxable income’ below its ‘accounting income’ that, on average, a 30 per cent tax rate applied to its taxable income translates into 10 per cent or less of its accounting income? If it is ‘fair’, what is the justification? That’s the real question, one that’s rarely asked but needs to be.”
ONE SIZE DOESN’T FIT ALL
In saying that with property trusts ‘the tax is being paid … by the end unit holders” the property lobby implies that only the holder not the trustee is liable for the tax.
It conveniently fails to mention that with at least some ASX listed property trusts such as Stockland and Scentre Group (formerly Westfield Retail Trust) the trust units are “stapled” to, and sold as one with, shares in a group company related to the trust.
The company itself is subject to company tax, and therefore its effective tax rate is open to scrutiny just like any other listed company. Westfield Group, the developer recently demerged from the trust, has an effective tax rate of just 8 per cent (versus zero for Scentre Group, the trust).
Moreover, ‘property trusts’ don’t fall under a ‘one size fits all’ tax rule. Some property trusts (rental investment trusts for example) may be treated as ‘trusts’ for tax purposes with the end unit holder not the trustee paying the income tax on the trust’s income.
Still others, if they are classed as public trading trusts (those in the business of buying and selling property, or constructing and selling property, rather than simply renting out) may be treated as companies for tax purposes and so be subject to company tax.
Yet others are of the ‘stapled’ variety where the tax treatment is a combination of unit trust distributions and frankable dividends (Stockland, Westfield).
The Property Council also refers to managed investment trusts (MITs) created to give ‘mum and dad’ investors the ‘same opportunity to invest in property as high net worth individuals and corporations’.
“Not mentioned is the fact that foreign resident ‘mums and dads’, high net worth individuals and corporations owning units in Australian MITs have been paying as low as 7.5 per cent tax on their MIT distributions while residents pay at the marginal or corporate tax rate,” says the ATO source. (It was 15 per cent for the 2010 income year, dropping to 7.5 per cent for the 2011 and 2012 income years, back up to 15 per cent for the 2013 income year onwards.
“Also, under section 128FA of the Income Tax Assessment Act 1936, any interest income paid to a foreign resident who lends to an MIT is exempt from Australian tax whereas a residents pay at the marginal or corporate tax rate. Are these rules ‘fair’?”
INCOME SOURCE ‘COMPLEX’
The fact is that trusts are used to legally avoid tax. Unlike most companies, trusts are entitled to the 50 per cent capital gains discount.
The concession can be passed on to individual, rather than corporate, beneficiaries who receive a distribution from the trust.
Foreign resident beneficiaries pay no tax at all on the gain if the trust itself is a “fixed trust” and the gain is not from, among other things, selling real estate. It is reasonable to ask if that outcome is fair, no matter whether you call it tax avoidance or not.
Other critics of the Tax Justice Network report have, extremely stridently, claimed trusts don’t pay company tax. Some do. Corporate unit trusts and public trading trusts, as defined under tax law, are treated for tax purposes as companies; they are taxed at the corporate rate and their distributions treated as dividends.
Claims that “companies pay tax in the countries in which the profits are earned” are patently ridiculous. Does Google “earn” the income from its Australian operations “in” Australia?
Presently, the ATO considers that the revenue that Google makes from its Australian customers selling advertising services to Australians is actually earned in Singapore. Google Australia’s only revenue comes from technology contract work for three of its offshore entities (hence it helps itself to R&D tax breaks). This may be the legal result – unchallenged as it is by the ATO – but is it fair?
Where tax is legally payable by a company or a trustee is not a question of where it is ‘earned’ (the legislation uses no such term) but is instead a complex question of the ‘source’ of the income, the ‘residency’ of the company or trustee, the country where the entity paying the income ‘incurs’ the expense, the type of income and the overriding complex rules of any applicable tax treaty.
Tax definitions of ‘source’ and ‘residency’ are fraught.
Manipulating one or other of the above factors, including engaging in tax treaty ‘shopping’ can alter the tax outcome. It is reasonable to ask if that outcome is fair, no matter that the manipulation is termed tax avoidance or not.