The country is outraged by Labor’s tax reforms. Who knew ‘reform’ could be for the worse? It sounds like such a nice word. Same as equality, hope, change and the French Revolution.
I often wonder how different the world would look if the unravelling of the French Revolution were taught at school, instead of World War I and II.
Discovering how pursuing egalite, fraternite and liberte worked out in practice for all concerned would be a real lesson for today’s activists.
But as a German, I never say this out loud.
Besides, we all know what the tax reform is really all about. The government’s biggest lobby group is in desperate need of a bailout.
Two of the nation’s big accounting firms were recently embroiled in privacy scandals. They allegedly shared the governments’ tax plans and their customers’ info to gain a competitive advantage.
All that privacy paperwork they make you sign? Not worth the paper it’s not even written on. Not on their end, anyway.
With fines, lawsuits and the end of lucrative government contracts looming, the accounting firms are as financially desperate as an NDIS provider during a fraud investigation. And just as morally righteous, no doubt.
But nothing spikes accounting firms’ revenue like tax reform that requires restructuring trusts. So the Treasury promptly and unexpectedly announced the Accountant’s Bailout Package in response to the accounting scandals. They labelled it tax reform – a rose by another name.
But the accountants are not the only ones in need of money. Our tax reform may be dressed up as French Revolution style social engineering. But it’s all about revenue. The cold hard cash, not the cold hard steel of the guillotine.
That’s why I know Australia’s tax raids have barely begun. Today, I’d like to warn you about the next seven tax reforms to expect. And we’ll look at which countries’ tax systems our Treasurer might get his inspiration from too…
1. Abolish unfair franking credits
Australia’s franking credit system is outrageous. It crushes the amount of tax on passive income to extraordinarily generous levels.
At least, that’s how it’ll be sold to the electorate…
The truth is that there is very little difference between the effective tax rates on share ownership between major developed countries. Australia just has an odd way of going about it. That makes simple comparisons a case of apples and oranges.
In many countries, dividends and capital gains are taxed at a fixed rate. Usually quite low, like Germany’s 26.375% and Japan’s 20%.
This sounds like paradise. My German mum was earning whopping dividend cheques each year, but paying 26.375%% flat tax. Best of all, because the 26.375% was automatically withheld, she didn’t even have to file a tax return!
Compare that to a dividend in Australia. It is added to your other income, pushing you into ever-higher tax brackets. A high-income earner will pay 47% on their dividend, for example.
I was busy making plans to semi-retire in Japan when I decided to re-run the maths.
What the franking credit and CGT discount of 50% actually do is bring us back to comparable levels with other countries. If you calculate from the point of a company’s pre-tax profits, you end up with comparable tax rates paid.
Apples to apples, Australia is not that different to our peers…under the current pre-reform system. The reforms to CGT would make us far higher tax. And if they’re willing to do that, why not dividends too?
If that sounds implausible, consider that it already applies to some of your shares. Franking credits only apply to Aussie stocks. Collect a dividend from overseas and you’re paying your top marginal tax rate.
That’s why Aussie dividend portfolios are so overallocated to local stocks. And why you should consider punting on the coming commodity Supercycle using these local recommendations.
You can see how the politicians will sell the coming dividend tax reforms. Cutting franking credits would only bring local dividends in line with foreign ones. The current system is racist toward foreign dividends.
The logic and math are irrelevant. Franking credits look unfair. And appearances are all that matters in today’s politics. Especially when it comes to tax and toilets.
International comparisons are not the only way franking credits and the 50% CGT get labelled as unfair. Franking credits make working for your income a high-tax endeavour, while collecting dividend cheques from the comfort of your La-Z-Boy looks low-tax.
That’s only true because your investments have already paid corporate tax, of course. But political activists think corporations themselves are evil. That makes the shareholders who own companies doubly evil. So they deserve to be taxed twice.
Can’t you just imagine the masses demanding more?
If not, check out the UK’s dividend tax reforms under Prime Minister Gordon Brown. Or recall the changes to tax treatment of dividend reinvestment plans.
The dividend-earning frog is being boiled, slowly but surely.
2. A Dutch wealth tax to cut the
trillionaires down to size
The Dutch tax wealth itself. They simply deem it has earned a return based on pre-determined guestimates. And tax that fictional profit at 36%.
Can you imagine how popular this would be in Australia? Having elected politicians decide how much money wealthy people’s investments earned would be an election winner.
Of course, anyone who has put their parents into aged care will know very well that Australia already has a wealth tax. It’s just not called that. It’s called ‘means testing’ instead.
But an additional proper wealth tax is coming now that the world has its first trillionaire to be jealous of.
Ironic because the government has a long history of creating trillionaires. There were millions of them during the Weimar Republic alone. All the German government had to do was borrow too much money.
Suddenly, taxes sound like the lesser evil.
3. German and Japanese inheritance tax, because your financial legacy is an unfair advantage
Our political system is obsessed with redressing past grievances. And it presumes wealth is an ill-gotten gain. Combine the two and you get inheritance tax.
But how would it work?
Some countries apply their inheritance tax to the heir. Others to the deceased. And still others to the location of the assets themselves.
The Germans and the Japanese are the cheeky ones. Their inheritance tax applies to anyone and everyone, anyway and every way you can imagine.
You can just imagine Jim Chalmers salivating at the thought of taxing Australians on the death of distant Maltese relatives. Or taxing distant Italian relatives on the death of their Australian family. That’s how the Germans do it.
Another option is to apply inheritance tax to foreigners whose relatives merely invested in Australia. The UK does this. ‘UK situs assets’, such as bank accounts and property investments on UK soil, are taxed at 40% inheritance tax even if you have no ties to the UK.
The funniest thing about inheritance tax is that the tax office and tax lawyers often don’t even know about the above when you raise it.
4. Super taxes, because that’s where the money is
For 16 years I’ve been warning that the Superannuation system is a trap. The type of haunted house that has its front door slam shut behind you once you are drawn in by the lavishly decorated lobby.
Government after government has edged the door more closed. Limits to lump sum withdrawals were step one to ensure nobody can escape through the front door.
And then, in 2023, Labor announced its true intentions for Super. Taxing unrealised gains and doubling tax rates to 30% on large balances.
The response was so bad that Labor shelved the plans in 2024.
Now they’re trying to remove the capital gains tax discount to replace it with an inflation adjustment that only applies to gains, not losses. But they’ll be back for your Super. Because that’s where the money is. And because tax advantages on compulsory contributions are unfair…
5. Japanese trust blindness
You might think a 30% minimum tax on trust distributions is bad. (Although I note that the sort of high-income earners you’ll find in parliament won’t care about this because they already pay more than 30% anyway. The measure really just targets the smaller savvy investor.)
But what if trusts simply ceased to exist?
This might sound a bit odd. But it already happens to some Australians. To find out how, you have to look overseas. Which I don’t recommend doing.
I can’t tell you how outraged Japanese and German people are about the Anglo concept of a family trust. It is simply impossible to explain to them. They simply refuse to believe that such a concept exists.
And so the Japanese tax office decided it could simply ignore them. They have the power to ‘look through’ a trust and tax people as though such a trust does not exist.
Move to Japan while keeping your Australian trust, and you could be in for a very nasty surprise. The sort our own jealous Treasury might want to emulate closer to home.
6. A generous gift tax
Likewise, Japan considers a joint bank account to be a legal impossibility. Who owns the money?
This becomes rather important because Japan also applies a whopping gift tax of up to 55% between spouses.
If you set up a joint bank account in Australia with a Japanese spouse, deposit money, and your wife spends it…look out! It’s deemed a gift.
Imagine receiving a German inheritance and putting the money in your joint Australian bank account, which you share with your Japanese wife. After paying German inheritance tax of up to 30% and Japanese inheritance tax of up to 55%, Japan could tax you on the ‘gift’ you ‘gave’ your wife at an additional 55%!
Over in Germany, the gift tax obligation is joint and several. A bit like a joint tenancy agreement in Australia. Both parties have to pay the full amount.
The trouble is, you don’t necessarily know whether the other party has paid the tax…
You might have been lied to about whether the tax was paid…
You might not even know that gift tax was due…
Or you might presume the German has to pay the German gift tax in Germany to the German tax office…
And if you ask the tax office and they don’t get back to you about what is owed and what’s been paid, that’s no excuse for not paying.
If Germans want to imprison foreigners, here’s how they do it (these days)…
They give a gift large enough to make the foreigner liable for gift tax in Germany. Then claim to have paid the gift tax. And then invite them to visit Germany to say ‘thank you’ for the gift in person.
The foreigner could get arrested at the airport for gift tax avoidance.
All this might make you want to leave Australia. But there’s a tax for that too!
7. A Canadian exit tax to keep the cows
safely corralled for milking
You really know a government owns you when it taxes you for trying to leave. Not so long ago, the UK even limited how much cash people could take out of the country to spend on holiday.
Many countries have exit taxes. Canada’s is infamous.
Of course, as any Australian who has tried to leave the country already knows, Australia has an exit tax. It’s just not called that. It’s called ‘deemed disposal’ instead.
Ask a journalist, lawyer, tax accountant or politician what the difference is between ‘deemed disposal’ and ‘exit tax.’ They’ll tell you the name is completely different, and how it is calculated is different. Ask an economist what the difference is, and you’ll get a shrug.
If you want to leave Australia to escape the coming taxes, you won’t want to anymore upon looking up ‘deemed disposal’.
The good news is that this could work to your advantage. Australia’s only productive sector is on the cusp of an extraordinary boom. There’s no need to look overseas for capital gains that’ll make the ATO seethe. Find out more here.
What’s in a name?
The Australian government would never call their coming tax raids ‘inheritance tax’ or ‘gift tax’. The taxes will get an obscure and bizarre name, like ‘deemed disposal,’ ‘means testing’ or ‘defranking debits.’
But as Shakespeare explained long ago, ‘a rose by any other name would smell as sweet.’
What’s the tax version of the same quote?
‘A tax by any other name would…’
Let me know in the comments below.
If you like this edition, be sure to check out my friend Dominic Frisby’s book Daylight Robbery.
And before you go, a quick correction. I sincerely apologise to both sides for calling Geert Wilders a Belgian in last week’s update. He’s from the Netherlands.
Regards,
Nick Hubble,
Strategic Intelligence Australia
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