Taxation

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GUEST OBSERVER
On 6 April 2016 the ATO released a document relating to its view of what is “arms-length” terms when a self-managed superannuation fund (SMSF) borrows from a related party of the fund.   
The release of these guidelines is welcomed in that it provides details of the ATO’s current view of how these arrangements can be structured. Questions have been raised by the SMSF industry in relation to related party loans for a number of years, and this document will assist the industry with an indication of the ATO’s view.
The guidelines provide safe harbours for loan arrangements for the purchase of real property or stock exchange listed shares or units. In providing these guidelines the ATO has expressed the view in relation to the following components of the loan including - 
·        minimum interest rate to be charged; 
·        fixed or variable interest rate terms; 
·        the term of the loan; 
·        the maximum loan to value ratio; 
·        the security to be provided; 
·        the ability for personal guarantees to be provided; 
·        frequency of repayments; and 
·        the type of agreement required. 
In assessing compliance with the above, the ATO is taking a practical approach in allowing SMSF trustees until 30 June 2016 to get their affairs in order with any loans from related parties. 
As such, any SMSF that has borrowed from a related party of the fund should review the arrangements before 30 June 2016 to ascertain if there is any impact on their current borrowing arrangements.
The ATO has also stated in the guidelines that arrangements outside of the safe harbours may be acceptable. However, in the event of the ATO reviewing the arrangements the onus will be on the trustees to “demonstrate this by maintaining evidence that shows their particular arrangement is established and maintained on terms that replicate the terms of a commercial loan available in the same circumstances.” 
The key issue for SMSFs is to review their current arrangements to see if they fit within the safe harbour provided by the ATO.  If they don’t, they should review their ability to fit within the safe harbour or consider their options by either, documenting why the arrangement is commercial, refinancing or winding up the arrangement.
Brad Eppingstall is director, of RSM Australia and can be contacted <a href="https://www.rsm.global/australia/" target="_blank">here</a>.
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ATO’s announcement on Self-Managed Superannuation Funds borrowing from related parties

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<img src="https://counter.theconversation.edu.au/content/57114/count.gif" alt="The Conversation" width="1" height="1">
GUEST OBSERVER
The government is still consulting on superannuation after concerns raised by backbenchers over changes made in the budget. However these changes are more important than ever, as evidenced by the 2016 HILDA statistics on wealth and superannuation.
The statistics highlighted changes in the distribution of wealth of Australians since the survey commenced in 2001. The most significant assets held by most Australians continue to be their family residence and superannuation, but policy changes over the time of decade the survey have changed the balance of those investments.
More concerning is the finding that wealth inequality has increased. The data adds strength to the argument that superannuation reforms are overdue, with a small number of wealthy people able to accumulate wealth in superannuation and investment property.
In Chapter 5 of the report, which discusses household wealth, the authors note that superannuation will soon overtake the family home as the major asset owned by Australians. This is the result of two separate trends: increases in superannuation balances and lower net wealth in housing.
Looking at the HILDA data, it’s not unexpected to see that younger age cohorts have experienced the strongest growth in superannuation assets.
Prior to 1993 superannuation was very different to the current system. According to Treasury data in 1986 53.5 percent of Australian full time employees did not have superannuation coverage, and over 80% of those who did, were members of a defined benefit scheme, which would not generally be reported as an asset. By 2000, 96.9% of full time employees had superannuation coverage, with 86% of those employees in accumulation type funds.
The superannuation guarantee has been a significant contributing factor in the importance of superannuation as a household asset. Notably, the phasing in of the rate of the superannuation guarantee shows in account balances. As can be seen from the HILDA report the increased rate of superannuation guarantee after 2002 has resulted in higher superannuation balances for people at the same age in successive surveys.
The increase in housing values is the second trend which has altered the mix of assets. Over this time residential house prices rose significantly, with ABS data showing an increase in the Residential Property Price Index across eight capital cities from 69.0 in September 2003 to 120.2 in Dec 2014.
Given that in the 2002 data the major asset of Australians was the family home, homeowners benefited disproportionately from the increased value of housing. Even with the significant increases in superannuation, for older Australians the proportion of wealth held in housing has been maintained as their total wealth has increased.
However for younger age groups the story is not as positive. The rate of home ownership is declining as it is becoming more difficult to enter the housing market and home equity is declining among younger age groups as the value of loans has increased.
The HILDA data shows that most age cohorts, including all except the oldest retirees, have seen increases in their superannuation accounts over time. Policy changes effective from 2007 have supported superannuants through tax exemptions and high contribution levels.
Another trend contibuting to this is that people are retiring later. The change in the pension age to 67 has been accompanied by a trend for people to work longer. Not only are they deferring withdrawals from their superannuation fund, but they are also continuing to contribute during this time.
As noted in the Productivity Commission report last year there is some evidence of withdrawals at the time of retirement, but these are generally used to pay outstanding debts, including mortgages against the family home.
Others convert their superannuation at retirement into other financial investments. This cements the family home as the most significant asset held by retirees.
The more concerning finding for policy makers is that wealth inequality has increased, and that superannuation holdings and investment properties are factors in this inequality. HILDA data shows that in 2014 the mean superannuation balance of the top 10% of people aged 50 to 69 was $991,268, up from $650,619 in 2002, compared to $210,798 in 2014 for the sixth to ninth decile and $13,719 for the bottom 50% (although a significant number of retirees in this age group do not have any superannuation balance).
There is a strong correlation between high superannuation balances, income and non-superannuation wealth. People in the top decile have access to higher levels of income to make higher levels of concessional contributions, and the ability to find the funds to make non-concessional contributions into a tax preferred investment environment.
As has been noted previously, the current superannuation system allows high income and high wealth individuals to over-accumulate in tax preferred superannuation, which increases wealth inequality as well as intergenerational inequality.
The Government proposals to restrict the level of contributions and to reduce the amount that can be retained in a tax free environment are important tools to address increasing levels of wealth inequality in our community.
Helen Hodgson is associate professor, Curtin Law School and Curtin Business School, Curtin University and author for The Conversation. She can be contacted <a href="https://theconversation.com/profiles/helen-hodgson-94553" target="_blank">here</a>.
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Wealth inequality shows superannuation changes are overdue

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<img src="https://counter.theconversation.edu.au/content/57114/count.gif" alt="The Conversation" width="1" height="1">
GUEST OBSERVER
Opposition Leader Bill Shorten told Q&amp;A viewers that the federal government spends more on negative gearing and capital gains tax discounts than it does on child care or higher education.
Is that right?
<h2>Checking the source</h2>
When asked for sources to support Shorten’s statement, an ALP spokesperson said the Grattan Institute has estimated the cost of the capital gains tax and negative gearing concessions at $11.7 billion per year.
The Treasury’s tax expenditure statement (TES) lists the cost of the capital gains tax discount as $6.15b for 2015-16. The TES does not list the cost of negative gearing, but using Grattan’s total figure and subtracting the value of the capital gains tax discount, this shows that the cost of negative gearing is around $5.5 billion… this cost exceeds the cost of child care assistance or university education as per the budget papers.
You can read the longer response <a href="https://theconversation.com/full-response-from-labor-spokesperson-61201" target="_blank">here</a>.
So, does federal government spending on child care or higher education outstrip the cost of revenue forgone due to negative gearing and capital gains tax (CGT)?
<h2>How much does the government spend on child care subsidies?</h2>
This year’s budget showed the federal government is estimated to spend about $8.2 billion on child care fee assistance in 2016-17. That’s comprised of about $4.2 billion for the child care benefit and about $3.9 billion for the child care rebate.
<a href="/images/2016/06/21/image-20160614-17209-1gramrh.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/06/21/image-20160614-17209-1gramrh.png" alt="">
Budget Paper 1, 2016-17 Federal Budget.
Here’s a graph produced by the Parliamentary Budget Office showing how the cost of child care subsidies is projected to change over time.
<a href="/images/2016/06/21/image-20160614-29225-1v45yz.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/06/21/image-20160614-29225-1v45yz.png" alt="">
<a class="source" href="https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Budget_Office/Chart_packs">Parliamentary Budget Office</a>
<div class="enlarge_hint"> </div>
<h2>How much does the government spend on higher education?</h2>
This year’s budget shows that the federal government is estimated to spend about $9.5 billion on higher education in 2016-17, an amount which is fairly stable over the forward estimates period. It is projected to be about $9.4 billion by 2019-20.
<a href="/images/2016/06/21/image-20160615-22416-5uy7q4.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/06/21/image-20160615-22416-5uy7q4.png" alt="">
Budget paper 1, 2016-17 federal budget.
Here’s a graph produced by the Parliamentary Budget Office showing how the cost of higher education expenses is projected to change over time.
<a href="/images/2016/06/21/image-20160615-22411-1qzpsjt.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/06/21/image-20160615-22411-1qzpsjt.png" alt="">
Parliamentary Budget Office
<h2>How much do negative gearing and capital gains tax concessions cost the government in revenue forgone?</h2>
Capital gains tax: As Labor’s spokesperson says, the Treasury’s 2015 tax expenditure statement (TES) lists the cost of the capital gains tax discount as $6.15 billion for 2015-16.
According to Treasury’s estimates of tax expenditures, the “cost” associated with the capital gains tax discount for individuals and trusts is estimated to be $6.8 billion in 2016-17, rising to $9.09 billion in 2019-20. Note that this estimate does not include any estimate for the concessional treatment of owner-occupied housing.
<a href="/images/2016/06/21/image-20160615-22398-cw74xm.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/06/21/image-20160615-22398-cw74xm.png" alt="">
Budget Paper 1, 2016-17 federal budget.
Negative gearing: This is where it gets tricky. Treasury does not regard negative gearing as a “tax expenditure” and thus does not provide any estimates for the “revenue foregone” as a result of it. So we have to look at other sources for estimates.
Labor has inferred from the Grattan Institute’s report that the cost of negative gearing is around $5.5 billion ($11.7 billion minus the $6.15 billion cost of the CGT discount).
Labor did not provide The Conversation with any Parliamentary Budget Office (PBO) estimates on the cost of negative gearing to The Conversation. Labor’s spokesman said only that the PBO estimated Labor’s plan to restrict negative gearing to new property and to halve the capital gains tax discount could raise $565 million over the forward estimates.
The Greens put the cost of negative gearing at somewhere around $4 billion a year.
A 2015 report by The Australia Institute said that modelling by National Centre for Social and Economic Modelling (NATSEM) estimated that:
negative gearing of residential investment property is currently reducing tax revenue by $3.7 billion per year.
Ben Phillips, Associate Professor at the ANU Centre for Social Research and Methods (who previously conducted the NATSEM modelling quoted by The Australia Institute), reported in February 2016 that:
We estimate that in 2017-18 the total tax savings from negatively gearing properties is $4.3 billion.
And I have previously estimated that negative gearing costs more than $5 billion per annum in revenue forgone – although that estimate was for the 2010-11 financial year when interest rates were considerably higher than they are today. It was also a “gross” figure that did not allow for the impact of interest expenses being carried forward to be offset against future capital gains tax liabilities.
So what’s the combined cost of negative gearing and CGT? Nobody knows for sure. It could be as high as $11.7 billion, as the Grattan Institute has <a href="https://grattan.edu.au/report/hot-property/">said</a>. It could also be lower.
<h2>So does CGT and negative gearing cost more than child care or higher education?</h2>
This year’s budget showed the federal government is estimated to spend about $8.2 billion on child care fee assistance and about $9.5 billion on higher education in 2016-17.
Using the estimates outlined above, the combined annual effective cost of negative gearing and capital gains tax discounts to the public purse in revenue foregone is somewhere between about $9 billion and $11.7 billion (although no-one knows for sure because of differing opinions on the cost of negative gearing).
So Shorten’s statement that Australia is “spending more at the Commonwealth level on negative gearing and capital gains tax discounts than we are on child care or higher education” is likely to be somewhere in the ball park – but it’s impossible to say conclusively.
<h2>A word of caution</h2>
It’s worth remembering that none of the major parties are advocating scrapping negative gearing altogether.
And finally, it is worth drawing attention to Treasury’s caution that its estimates of tax expenditures such as the capital gains tax discount assume that taxpayer behaviour is unaffected by the existence of the concessional tax treatment. That assumption that may not be valid in practice, so that these estimates:
do not indicate the revenue gain to the budget if specific tax expenditures were to be abolished…. care needs to be taken when comparing tax expenditures with direct expenditures as they may measure different things.
<h2>Verdict</h2>
Is Australia “spending more at the Commonwealth level on negative gearing and capital gains tax discounts than we are on child care or higher education”?
Nobody knows for sure, because of the difficulty in measuring exactly how much negative gearing tax breaks cost the federal government every year in revenue foregone. (Treasury cautions against comparing tax expenditures with direct expenditures as they may measure different things.)
Using available estimates, however, Bill Shorten’s statement is probably in the ballpark.
<h2>Review</h2>
I agree with this assessment of the statement. There are official estimates on the projected spending on childcare, education and the revenue foregone in relation to the capital gains tax discount, although as Treasury notes these figures may not be directly comparable. It is more difficult to estimate the foregone revenue in relation to negative gearing as there are no official estimates. Each model will come up with a different estimate based on the parameters used for the estimate.
I would also caution that the statement by Bill Shorten should be read in conjunction with proposed ALP policies in these areas. In particular, tax concessions on negative gearing and the CGT discount will be pared back but negative gearing will still be available to taxpayers currently holding investment properties, and the CGT discount will be halved but not removed.
Given the difficulties in identifying the cost of negative gearing and the problems inherent in comparing data measured differently, the statement is within reasonable estimates. – Helen Hodgson
 
Saul Eslake is vice-chancellor’s fellow, University of Tasmania and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/saul-eslake-665" target="_blank">here</a>.
Helen Hodgson is associate professor, Curtin Law School and Curtin Business School, Curtin University and author for The Conversation. She can be contacted <a href="https://theconversation.com/profiles/helen-hodgson-94553" target="_blank">here</a>.
 
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What’s the combined cost of negative gearing and CGT? Saul Eslake

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GUEST OBSERVER
It is time for the state government to put the interests of first homebuyers at the top of its agenda.
As part of a review of its Real Tax Policy ahead of the June 10, 2016 NSW Budget, REINSW has called for the state government to make amendments to stamp duty for first homebuyers.
Home ownership is not only something that individuals should aspire to, it is also something that government should foster and encourage as a means of building wealth and providing for a persons care post employment.
The NSW government needs to provide first homebuyers with a 50 percent reduction in the stamp duty on a purchase of a residential property less than $1 million and provide the ability to pay the stamp duty over time. 
Not supporting first homebuyers is to say the least short sighted and creates the risk that our best and brightest will be enticed to other states where the dream of home ownership can be a reality. 
The existing first homebuyer incentives are focused on new dwellings. The strategy being, by focusing demand toward new properties this will correct the supply problem. 
Unfortunately the strategy has two major short comings, firstly most first homebuyers buy existing properties as new dwellings are financially beyond their capacity. Secondly increasing demand will not solve the supply problem. 
We refer to ourselves us the Premier State, if there is truth behind the words then providing a pathway for our first homebuyers into their own home, is a clear way to demonstrate that the words have substance,.
John Cunningham is president, REINSW and can be contacted <a href="https://www.reinsw.com.au/imis15_Prod/web" target="_blank">here</a>. 
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NSW tax policy calls for first homebuyer relief: John Cunningham

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<img src="https://counter.theconversation.edu.au/content/57114/count.gif" alt="The Conversation" width="1" height="1">
GUEST OBSERVER
Tax reform to target Australia’s distorting capital gains tax and negative gearing regimes could net the government A$5.3 billion in tax revenue per year, according to a new report from the Grattan Institute.
<a href="https://grattan.edu.au/report/hot-property/" target="_blank">The report</a> recommends reducing the capital gains tax discount for individuals and trusts to 25 percent, and phasing in limits to negative gearing over 10 years.
“The case for reform is extremely strong and we do not think that this is likely to lead to a material crash in the housing market,” said the report’s author John Daley.
Daley and report co-author Danielle Wood have modelled the impact of their recommendation on house prices, rents and the rate of new housing development, estimating house prices would be 2 percent lower than otherwise.
Under their suggested tax changes people would no longer be able to write off losses from passive investments like housing against unrelated wage income.
“The only developed country we have found that lets you deduct the costs of interest and allows you to deduct it from your labour income apart from us is New Zealand,” Daley said.
Curtin Law School Associate Professor Helen Hodgson said the proposals were well balanced, based on sound evidence, and would improve the efficiency and fairness of the tax system.
She said the challenge was to claw back concessions without creating further distortions. “In that respect the Grattan Institute recommendations go further than those proposed by the Australian Labor Party.
“The ALP proposals allow existing negatively geared properties to remain deductible. This would have a lock in effect similar to the pre-CGT exemption from capital gains tax. Borrowers would be reluctant to sell their property and reinvest in other, potentially more productive, forms of investment.
The Labor Party proposal would reduce the capital gains tax discount to 25 percent and restrict negative gearing to new properties only.
Daley said this approach was likely to create a new distortion in the housing market.
“Essentially those new houses will be higher priced than the older houses and so you’ll get a distortion as investors disproportionately show up to the auctions for new housing and owner-occupiers disproportionately show up to the auctions for old housing. I’m not sure why we’d want to encourage that.”
Prime Minister Malcolm Turnbull has argued Labor’s proposal would deliver <a href="https://theconversation.com/negative-gearing-changes-wont-drive-all-investors-from-the-housing-market-heres-why-55505">“</a>massive shocks” to the residential housing market, removing all investors. Finance Minister Mathias Cormann has said it would drive down the value of established properties, and push up the cost of rental accommodation.
But Daley said given new housing supply was significantly restricted by planning rules rather than inadequate returns, it was unlikely there would be any material impact on supply or rents.
“As Commonwealth Bank CEO Ian Narev, who sits on a loan book of $400 billion has said, what keeps him awake at night is interest rates and unemployment rates, not negative gearing.”
Data from the Australia Tax Office shows negative gearing is more popular among taxpayers on higher incomes, and the Grattan Institute argues it largely benefits the wealthy.
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<img src="/images/2016/04/26/image-20160422-26970-mc5e3t.png" alt="">
<h4>
Taxable income is income after deductions, including rental loss deductions. ATO/Grattan Institute, Author provided
</h4>
Reforming the system would result in more funds instead flowing into equities, businesses and bank deposits.
“The current regime pushes people into property, it encourages them into much higher leverage than they would have otherwise, and that increases the volatility of the housing market and the vulnerability of the financial system,” Daley said.
 
Charis Palmer is deputy business editor, The Conversation, and can be contacted <a href="https://theconversation.com/au/team#charis-palmer" target="_blank">here</a>.
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Negative gearing windbacks could deliver $5.3bn a year: Grattan Institute

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<img src="https://counter.theconversation.edu.au/content/57114/count.gif" alt="The Conversation" width="1" height="1">
GUEST OBSERVER
A long-term plan to cut the company tax rate from 30 percent to 25 percent is the centrepiece of the Coalition’s economic plan for jobs and growth.
The Coalition maintains the change will boost GDP by more than 1 percent in the long-term, at a budgetary cost of $48.2 billion over the next 10 years.
But the very Treasury research papers relied on by the Coalition tell a more modest story than the headlines. Using these papers, we show that the net benefit to Australians in the real world will be only about half of the headline benefit, and it will be a long time before we are any better off at all.
<h2>The short story</h2>
The Government has made two claims about the economic impacts of its plan to cut the company tax rate.
On Budget night Treasurer Scott Morrison said that the tax cuts would:
“… mean higher living standards for Australians and an expected permanent increase in the size of the economy of just over one percent in the long term.”
Later last week, Prime Minister Malcolm Turnbull said:
“The Treasury estimated last year…that for every dollar of company tax cut, there was four dollars of additional value created in the overall economy.”
<h2>Sound in theory, but there’s a back story</h2>
In theory, cutting the company tax rate boosts the economy in the long term. All taxes distort choices, and thereby drag on economic activity. Taxes on capital often have especially large economic costs because they discourage investment, which is mobile across borders. By some estimates, roughly half of the economic costs of Australian company tax ultimately fall on workers, as lower company profitability leads to lower investment, and therefore lower wages and higher unemployment.
But while the theoretical argument for company tax cuts is straightforward, the real story is more complicated.
<h2>The twist: a tax cut for foreign investors</h2>
The twist in the tale comes from Australia’s system of dividend imputation, or franking credits. The effect of this system is to make the company tax rate for Australian resident shareholders effectively close to zero. In nearly every other country, company profits are taxed twice: companies pay tax, and then individuals also pay income tax on the dividends, albeit often at a discount to full rates of personal income tax.
But in Australia, the shares of Australian residents in company profits are effectively only taxed once. Investors get franking credits for whatever tax a company has paid, and these credits reduce their personal income tax. Consequently, for Australian investors, the company tax rate doesn’t matter much: they effectively pay tax on corporate profits at their personal rate of income tax.
As a result, although Australia has a relatively high headline corporate tax rate compared to our peers, in practice the comparable tax rate is lower – at least for local investors. As a result, many of the international studies about the impact of cutting corporate tax rates are not readily applicable to Australia.
Local shareholders do get one small benefit from cutting corporate tax rates. If companies pay less tax, then they have more to reinvest, so long as the profits are not paid out to shareholders. Yet in practice, most profits are paid out. Therefore a company tax cut will generate little change in domestic investment.
By contrast, foreign investors do not benefit from franking credits. They pay tax on corporate profits twice: first at the company tax rate, and then as income tax on the dividends. This means that a cut to the company tax rate provides big benefits to them.
This week The Australia Institute pointed out that foreign investors from the United States and other countries that have tax treaties with Australia may not benefit from the company tax cut, because their home governments will collect the gains from any cut to Australia company tax as additional company tax. Yet this would only occur when foreign firms repatriate profits earned in Australia to the home country.
The big reductions in net tax revenue – and therefore the large benefits to companies – are expected when the corporate tax rate is cut from 30% to 25% between 2022 and 2027 for larger companies, including the bulk of businesses that are foreign-owned.
The headline from the Treasury modelling for the 2016-17 Budget is that this cut will ultimately increase GDP by up to 1.2% meaning larger foreign companies are attracted to invest more in Australia. The finding is based on work contained in a Treasury research paper that modelled the long-term impact of a company tax cut.
<h2>Activity is not income</h2>
However, it is a mistake to assume that all the increase in economic activity will make Australians better off. We often use Gross Domestic Product – the sum of all economic activity – as a short-hand measure for prosperity. But when the benefits disproportionately flow to non-residents, GDP can be misleading. It’s much better to look at Gross National Income (GNI), which measures the increase in the resources available to resident Australians.
Treasury expects that cutting corporate tax rates to 25% will only increase the incomes of Australians – GNI – by 0.8%. In other words, about a third of the increase in GDP flows out of the country to foreigners as they pay less tax in Australia. And because most of the additional economic activity is financed by foreigners, the profits on much of the additional activity will also tend to flow out of Australia.
<h2>You don’t get something for nothing</h2>
Yet even this increase in GNI of 0.8% is not the best estimate of the improvement in living standards Australians can expect from the Government’s company tax plan. If company taxes are lower, other taxes have to be higher, all other things being equal. In the modelling discussed so far, Treasury first assumes that these revenues can be collected by a fantasy tax that imposes no costs on the economy.
But that’s not what happens in the real world. So the Treasury research paper also models the scenario in which personal income taxes rise to offset the reduced company tax revenue. On this more realistic assumption, Treasury estimates that GNI will increase by just 0.6% in the long term, or roughly $10 billion a year in today’s dollars.
<a href="https://62e528761d0685343e1c-f3d1b99a743ffa4142d9d7f1978d9686.ssl.cf2.rackcdn.com/files/122984/width754/image-20160518-13455-yxfw6e.jpg" target="_blank">Click to enlarge</a>
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<h2>Other wrinkles in the story</h2>
Even this more modest Treasury figure may well over-estimate the long-term boost to GNI. In the real world, progressive income taxes impose higher costs than the hike to a hypothetical flat-rate personal income tax that Treasury modelled. Companies may also not increase investment as much as Treasury expects, and those firms that are part of oligopolies in Australia may not increase wages by as much as Treasury assumes.
While these are reasons to expect that the Treasury modelling overestimates the economic benefits of a company tax cut, they are offset by some more conservative assumptions. Treasury believes that tax cuts modestly change how much firms shift profits overseas; it may overstate how much tax cuts flow into additional profits rather than higher wages in those industries that it does recognise as oligopolies; and it may discount the benefits of investors making less distorted choices between debt and equity funding.
<h2>The verdict on the first claim</h2>
The bottom line is that, on Treasury’s own modelling, a corporate tax cut will increase Australian incomes in the long term by up to 0.6%. The Treasury research paper doesn’t commit itself to a timeframe, but it cites other work that expects the economic benefits of company tax cuts to take 20 years to bear fruit, with half the benefit in 10 years. Given that the important (and expensive) part of the corporate tax cuts only starts to take effect from 2022, Australia will be waiting 25 years for a 0.6% increase in incomes.
This economic benefit needs to be seen in context. If Australian per capita GDP and GNI increase at 1.5% a year (as the budget papers routinely assume), then over 25 years, incomes will rise by 45.1%. Corporate tax cuts mean that instead, incomes will rise by 45.7% – or perhaps a bit less. It may still be worth doing, but it’s not a plot twist that dramatically changes Australia’s story.
Others claim that in the past, company tax cuts have had no measurable effect on the economy. This is disputed – there may well be a link between corporate tax cuts and economic growth. But it’s inevitably hard to see in practice because on Treasury’s own modelling the economic effect of company tax cuts is small relative to other changes.
<h2>Not four-to-one, more like dollar for dollar</h2>
This brings us to the Government’s second claim. Late last week, Mr. Turnbull said that each dollar in company tax revenue cut would deliver an extra four dollars in GDP.
His claim appears to be drawn from an earlier 2015 Treasury research paper that modelled the economic impact of major Australian taxes, including company tax. The more <a href="https://www.treasury.gov.au/PublicationsAndMedia/Publications/2016/working-paper-2016-02">recent</a> Treasury working paper, released in Budget week, implies a slightly larger $4.30 increase to GDP from each $1 in revenue cut.
But again this misses a big part of the story.
First, this claim is about GDP, and therefore includes the disproportionate increase in the income of foreigners. Our analysis of the Treasury modelling shows that the increase to Australian incomes, or GNI, is only $2.80 per dollar of revenue lost from a corporate tax cut.
Second, when corporate tax is replaced by a still hypothetical but marginally more realistic flat rate income tax – rather than a complete fantasy tax that has no impact on the economy – the increase to Australian incomes is less again: only $1.80 per dollar of revenue lost.
Third, the Prime Minister has framed the boost to the economy in terms of the long-term increase to GDP per dollar of company tax cut. Treasury calculates the revenue “dollar” lost after considering the additional tax revenue that the government hopes to collect from all taxes in twenty years time as incomes rise because of greater investment.
<a href="https://www.theaustralian.com.au/federal-election-2016/federal-election-2016-pm-bolstered-by-160bn-reform-promise/news-story/e5fe769c97a196959b6e34e14bcc273d?nk=21bd5293c6c9bf91e73e578611f79538-1463363505&amp;login=1">Many people</a> would interpret the Prime Minister’s statement to compare the ultimate benefit per dollar of tax revenue given up in the shorter term. On this basis, the increase to Australian incomes in the long term is only $1.20 for every dollar given up in the short term as a result of corporate tax cuts.
This story ends the same way. Corporate tax cuts may be worth doing, but the outcome is unlikely to set pulses racing.
<a href="https://62e528761d0685343e1c-f3d1b99a743ffa4142d9d7f1978d9686.ssl.cf2.rackcdn.com/files/122985/width754/image-20160518-13481-1ugr3e5.jpg" target="_blank">Click to enlarge</a>
<h2><img src="https://62e528761d0685343e1c-f3d1b99a743ffa4142d9d7f1978d9686.ssl.cf2.rackcdn.com/files/122985/width754/image-20160518-13481-1ugr3e5.jpg" alt=""></h2>
<h2>The journey matters</h2>
So far, as the Treasury research paper does, we’ve focused on the long-term economic boost from a company tax cut once the economy has fully adjusted. But the journey to get there also matters.
For a decade, a cut to corporate taxes will reduce national income. Foreigners will pay less tax on the profits from their existing investments in Australia, reducing Australian incomes. Foreigners own about 20% of all capital in the economy, so it’s a big windfall gain for them. We estimate that when a 5 percentage point tax cut for big business is first implemented, national incomes will be reduced by about 0.5%, as a result of the immediate loss in company tax revenues formerly paid by foreign investors.
The benefits to Australians from a corporate tax cut only accumulate slowly as foreigners make additional investments. Treasury cites a paper that estimates that the benefits of corporate tax cuts take 20 years to flow through. Assuming that these benefits increase at a constant rate, Australian income will only be larger than otherwise after about 10 years.
Of course, the upfront costs of a company tax cut over the first decade must be offset against the long-term gains. On our estimates, the loss of income incurred over the first decade will only be offset by higher incomes after about 19 years. If Australians want the modest economic benefits of a corporate tax cut, they will be waiting a long time.
<h2>The moral of the story</h2>
Company tax cuts are not a knight in shining armour to save the Australian economy. On the basis of the modelling that the government uses to support its case, corporate tax cuts can make a modest contribution, and then over the very long term. That story won’t sell as many copies. Truth, on this occasion, is duller than fiction.
John Daley<a href="https://theconversation.com/profiles/john-daley-1870" rel="author" style="line-height: 1.3em;"> </a>is chief executive officer, Grattan Institute and can be contacted <a href="https://theconversation.com/profiles/john-daley-1870" target="_blank">here</a>.
Brendan Coates is fellow, Grattan Institute and can be contacted <a href="https://theconversation.com/profiles/brendan-coates-154644" target="_blank">here</a>.
Both are authors for The Conversation
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The full story on company tax cuts and your hip pocket

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<img src="https://counter.theconversation.edu.au/content/81551/count.gif?distributor=republish-lightbox-advanced" alt="The Conversation" width="1" height="1">
GUEST OBSERVER
There is very little, if anything, to commend discretionary trusts. The benefits they bring, and it’s hard to see many, are dwarfed by their destructive and damaging features.
Trusts are usually used to allocate money to members of a group, usually a family. Under a discretionary trust, the only way a beneficiary will get income or capital from the trust, is if the trustee chooses to give them something. Family companies are often included as beneficiaries to minimise tax.
The Labor party’s current focus on trusts is warranted because overwhelmingly, trusts are used to minimise tax, avoid paying creditors and to avoid the fair division of property after a relationship breakdown.
Due to a lack of data, it’s hard to estimate the amount of lost tax revenue from the current regime. However, on conservative assumptions, I estimate we are easily losing A$2 billion per year in income tax through discretionary trusts. 
If a discretionary trust elects to be a “family trust” under the tax law, it can also access a number of other concessional tax rules. These tax concessions aren’t available to any other entities or taxpayers.
How trusts are used
There are a few other ways discretionary trusts are used. They are also used to frustrate creditors, people who are owed money by the beneficiaries of trusts. 
Someone who is owed money by a beneficiary of a trust can’t go to the trust to settle their debt. This is the case even if the beneficiary has received money from the trust in the past and is likely to receive money in the future, after release from bankruptcy (having not paid their debts).
Unsecured creditors, such as suppliers of businesses dealing with a trustee, also cannot settle their debts with a trust if the trustee doesn’t have sufficient assets. Often the trustee will be a company paid to manage the trust, with only a few dollars of share capital. 
According to data used in my research from the Australian Taxation Office, a lot of family wealth (aside from the family home) is held in discretionary trusts. On relationship breakdown, one spouse will often argue that because the assets are in a discretionary trust, they are not owned by anyone, and therefore won’t be divided with the rest of the couples’ assets.
The Family Court has wide powers to decide what can be divided, and generally the court included assets in the discretionary trust to be divided, where a spouse is a trustee, or has the means to appoint or remove a trustee. However, if the spouse is “removed” or “distanced” from the discretionary trust, it becomes harder and harder for the court to include these assets to be divided.
Discretionary trusts are also used in succession planning. Where a person has property to give away and wants the flexibility to do it over time. It also allows the payments to change with needs and circumstances. For example, if a trust beneficiary landed a high-paying job, they could be given less. Conversely, they could be given more if they lost their job.
There may be a case for these arrangements when a person has died. By putting assets into a discretionary trust, a deceased person may be able to “tie up assets” for around 80 years (the maximum period permitted). But this sort of flexibility is available to anyone when they are alive; there is no need for a discretionary trust. 
So can we just get rid of trusts? Legally, it could be done. But outright abolition is not practically achievable, at least in the short-term.
What to do with trusts
There are broadly two options for tax reform when it comes to trusts. These measures can be implemented while leaving users of discretionary trusts free to enjoy all other legitimate features and benefits.
The first option, which many still seem to favour, is to impose the company taxation system on the discretionary trust (that is, tax them as companies). Due to the presence of the <a href="https://www.ato.gov.au/Business/Imputation/In-detail/Utilising-franking-tax-offsets-and-effect-on-losses---corporate-tax-entities/">refundable franking credit tax offset rule</a>, taxing trusts as companies would not really address the central issue of tax minimisation. 
Trusts would still be able to manipulate allocations of money across low-rate beneficiaries and change allocations from year-to-year to avoid tax. However, it would remove the availability of the capital gains tax discount to discretionary trusts.
Another option is to use an attribution approach to trusts, just as the social security system does and as family law effectively does. Under the attribution model, the person who contributed the assets to the discretionary trust and/or the person who controls the assets in the trust are deemed to own the income and the assets. This would largely reflect general law entitlements of each spouse and very often reflect the economic contributions to building up those assets.
Of course, this model has challenges in design and in enforcement. However, given the complexity of rules in Australia’s income tax and the enforcement issues that confront the Australian Taxation Office in numerous areas, any difficulties with the attribution model are easily overcome. And of course, it’s already part of the social security regime for assets and income tests.
<a href="https://theconversation.com/profiles/dale-boccabella-15706" target="_blank">Dale Boccabella</a> is Associate Professor of Taxation Law, UNSW and author for <a href="https://theconversation.com/au" target="_blank">The Conversation</a>.
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Family trusts often cause more harm than good

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GUEST OBSERVER
The Howard government, when flush with revenue, made a bad tax decisions which continue to haunt current policy makers. 
It removed the tax on the retirement phase of superannuation, this has been partly resolved by current government’s recent changes. But the Howard government also replaced the full taxation of real capital gains with concessional treatment of capital gains (only 50% of gains taxed). This remains as a tax avoidance loophole which both parties acknowledge but are reluctant to act upon.
The reason is straightforward. Assets put into superannuation in the accumulation phase and held until the retirement phase, can then be sold with no, or minimal, capital gains tax payable. This a major incentive to put assets into super and hold them until the retirement phase.
Without further changes to superannuation taxation, this is simply going to worsen the social problem of the well-off adopting tax minimisation strategies by piling as many assets into super as possible. Remember, it will still be possible to contribute up to A$100,000 per annum as non-concessional contributions.
Consequently, the well-off could easily build up a pool of assets of several million dollars or more, which when sold in retirement will still get very, very, favourable capital gains tax treatment under super.
If superannuation assets in retirement are under the A$1.6 million cap, no tax will be payable on capital gains from sales of assets. If assets are above the cap, the tax rate applied to capital gains is 10%.
For example, an asset costing $100,000 and held for 15 years, increasing in price at an average of 7% per annum would be sold for $276,000. If in super, tax payable would be $17,600. If outside of super, on the top marginal tax rate (including levies) of 49%, the tax payable would be $43,096.
If the concession on capital gains tax was reduced (without addressing the concessionary rate in super), the incentive would be even bigger. For example, if the concession was reduced to 25%, tax payable on the capital gain outside of super would be $64,644, an even larger gap to the tax payable in super of $17,600.
Putting $100,000 per annum into super for 15 years with an average 7% capital gain per annum generates a portfolio worth $2.7 million. The capital gains tax savings on this being in super, rather than outside, are more than $1 million!
So, what are the consequences if a brave government elects to reduce the concession applied to capital gains tax? If they make no changes to super tax arrangements there are at least two likely consequences.
First, there is increased incentive for individuals to set up self managed super funds to exploit these tax arbitrage or minimisation loopholes.
Second, despite taxation of earnings on retirement income balances over the A$1.6 million cap, maximising non-concessional contributions into self managed super funds will remain attractive, to take advantage of the difference in capital gains tax rates on assets inside versus outside super – to the detriment of future government budgets.
The consequences for self managed super funds incentives to borrow (via non-recourse arrangements involving trusts) to purchase assets such as property are unclear. As described on one adviser’s website:
Such borrowing will enable trustees to acquire assets over and above the assets that can be obtained from contributions. The caps on contributions can therefore be “overcome” by such borrowings.
However, it is doubtful that there are tax arbitrage benefits from using leverage to purchase assets via super (because higher marginal tax rates mean higher tax deductions for interest on borrowings outside of super).
For reasons of social equity, any general changes to the capital gains tax rate will also need to address capital gains tax within super. Admittedly there is already a lower concession in the case of super (two-thirds of gains are taxed versus one-half).
But that means taxing capital gains in super at only a 10% rate, leaving strong incentives to thwart higher capital gains tax by locating assets within super. Failing to reduce the capital gains tax concession in super would be likely to undo a substantial part of the effectiveness of any general changes the government has already made.
Kevin Davis is research director of Australian Centre for Financial Studies and Professor of Finance at Melbourne and Monash Universities, Australian Centre for Financial Studies. He is an author for The Conversation and can be contacted <a href="https://theconversation.com/profiles/kevin-davis-3497" target="_blank">here</a>.
 
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Despite superannuation changes, one tax loophole remains: Kevin Davis

Open letter to Bill Shorten - don’t touch negative gearing or the capital gains tax: Gavin McPherson

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GUEST OBSERVER
Stamp duty concessions, including exemptions for downsizers and adjustments for off-the-plan buyers, should be incorporated in the WA state budget to tackle Perth’s failing housing targets. 
With the release of Perth’s long-term planning blueprint in 2011, there was a clear objective to reduce urban sprawl by driving higher-density housing options in established areas as the city’s population grows to over 3.5 million people.
Since then, we’ve seen changes in the types of housing being constructed in metropolitan Perth with an increase in multi-residential complexes, rather than the traditional trend of single dwellings.
This has been driven by a shift in buyer attitudes towards apartment living as well as many councils adopting planning schemes that are conducive to higher-density housing.
However, it’s clear that more needs to be done as Perth’s infill development continues to fall short of the state’s target of 47 percent.
Initiatives key to reaching housing goals
Two initiatives that are conducive to the state’s long-term planning targets are the exemption of transfer costs for downsizers and the modification of stamp duty for off-the-plan purchases.
These concessions should be included in the WA budget, scheduled for May 12, to incentivise buyers to continue to move into high density housing and, in turn, support the state reach its infill targets.
1. Exemption of transfer costs for downsizers
The introduction of a one-off stamp duty exemption for people over 65 who are selling their family home to downsize.  The exemption should be available in any cases where the family home sells for less than $1 million and the buyer purchases a property of a lesser value. Given that many retirees are hesitant to downsize because of the high stamp duty costs involved, a one-off exemption would provide a significant incentive to move to a smaller residence, possibly in a higher-density complex. It would also help free larger blocks in established areas for development of more higher-density housing options.
2. Modify how stamp duty is applied for off-the-plan purchases
Changing the way stamp duty is applied to off-the-plan purchases will drive more buyers to higher-density housing options. An effective method, which is utilised in other Australian states, is to charge stamp duty on the value of the land alone, rather than the combined value of the land and the dwelling. For example, take a developer who acquires a development site for $1 million and then seeks to build 30 apartments on the site. 
This would make the value of the land of each apartment worth approximately $33,000, which a potential buyer of one of the apartments would then pay stamp duty on. This should only be applied to off-the-plan purchases made prior to the start of construction. Any apartments purchased after the start of construction would have to pay stamp duty on the full price of the land and dwelling. 
Such an initiative would incentivise buyers to purchase high-density housing options during presales, because they save on the stamp duty. It would also assist developers attain finance for these projects, as lenders typically require about 60% of apartments sold as presales before approving funding.
Without further impetus for buyers to move to high-density housing, Western Australia, and more specifically Perth, risks falling significantly short of its key housing goals.  
Such stamp duty concessions are a swift and low-cost lever the Barnett government can pull in its forthcoming budget to help realise its long-term planning blueprint.
 
Damian Collins is the founder and managing director of Momentum Wealth and can be contacted <a href="https://www.momentumwealth.com.au/damian-collins/" target="_blank">here</a>.
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