Interested in an Onshore Tax Haven?

The All Ords ‘tease and disappoint’ act continues. After rallying in March, the Australian share market has fallen back to 5000 points. A level it first reached a decade ago.

The Dow surrendered some of its recent gains last night, losing around 1% in value. Gold was up a little.

On the first Tuesday of each month the RBA meets to decide whether to give the thumbs up — or down — to the savers and borrowers of Australia.

That little sigh of relief you heard yesterday was from the savers of Australia.

The RBA’s decision to keep interest rates on hold means they don’t have to put another hole in their belts…yet.

RBA Governor Glenn Stevens’ statement on the ‘Monetary Policy Decision’ was as predictable as a sunrise.

About half way down there’s always this clue to what makes a modern economy function: ‘Given these conditions, it is appropriate for monetary policy to be accommodative. Low interest rates are supporting demand…

Low interest rates are supporting demand…demand for debt, that is. According to RBA data, Australian households are more indebted than ever before. But that’s OK.

Thanks to accommodative monetary policy the good news is the cost of servicing the increased level of debt is not a drain on household budgets. By keeping rates low, and debt affordable, the RBA is providing plenty of scope for households to add more debt to their balance sheet.

This is plain stupidity. But, then again, this is what passes for rational economic thinking these days. Living within your means, prudence, and saving went out of fashion along with black and white movies.

One thing that never goes out of fashion, though, is how to minimise or avoid tax.

The famous biblical text ‘Render unto things that are Caesar’s…’ gives an insight into how long citizens have been wrestling with paying the taxman. It’s human nature to want to keep more of what you earn, inherit, win or steal.

The news this week that the rich and powerful are actively continuing this ancient cat and mouse game with the tax collector is dominating the headlines.

The leaking of millions of confidential documents, dating back to 1977, has exposed the handiwork of Panamanian legal firm, Mossack Fonseca.

An international team of journalists have been poring over the documents; the juiciest bits have been capturing the headlines.

The ABC reports:

The leak reveals the offshore holdings of 12 current and former world leaders including Iceland’s Prime Minister Sigmundur David Gunnlaugsson, as well as relatives of Syria’s President Bashar al-Assad, friends of Russian President Vladimir Putin and members of China’s Communist Party elite.

More than 1,000 Australian links to companies have been found in the data leak including the passports of hundreds of Australian citizens connected to companies as directors, shareholders and beneficial owners.

Twenty-nine Forbes-listed billionaires are also named in the leak.

The reaction from various countries is a sideshow in itself. Iceland’s PM has fallen on his sword (admittedly he had a lot of help in falling). China has banned news outlets and social media from covering the story. Russia claims it is a Western conspiracy to discredit Putin. The late father of the UK, Prime Minister David Cameron, was also named in the documents…all while Cameron is running a platform of clamping down on tax evasion.

Everything I’ve read has said that Mossack Fonseca actions were legal.

The ABC again:

Is it legal?

Yes. The use of shell companies in tax haven jurisdictions is legal. However, the opaque environment in which they operate is often open to abuse by criminals and individuals who want to avoid liability by keeping their identities and activities anonymous.

If you had a few hundred million, or a few billion, dollars and you could afford to put in place the structures to legally minimise your tax, would you do it? Now, in this world of publicly doing and saying the right thing, you can answer that question truthfully in private. My very public answer is ‘hell yeah’.

Ever paid a ‘tradie’ cash? Ever been paid cash and not declared it? Ever organised your affairs to pay less tax? Ever been faced with a big tax bill, asking your accountant what you can do to reduce it? Of course you have. None of us want to pay more.

Remember Kerry Packer’s infamous response to the 1991 Senate Inquiry?

“I don’t know anybody that doesn’t minimise their tax. I’m not evading tax in any way shape or form. Of course I’m minimising my tax. If anybody in this country doesn’t minimise their tax they want their head read. As a government I can tell you you’re not spending it that well that we should be paying extra.”

The hypocrisy of nation leaders using offshore tax havens, while imploring their citizens to pay their fair share, is galling. But hypocrisy is also not a recent phenomenon. Hypocrites have been around long before the Roman’s popularised the term. You’ll never outlaw people speaking out both sides of their mouth…if we did, then prisons would be full of politicians, bureaucrats, union officials and CEOs.

Here’s a controversial way to look at the use of these tax havens…they act as a restraint on political pork-barrelling.

How so?

Imagine we live in a dream land where everybody pays the correct amount of tax. In this utopian world the government’s coffers are suddenly enriched to the tune of $40 billion. Enough revenue to balance its budget.

Who wants to take a bet on how long that budget would stay balanced?

Based on the Rudd/Swan experience, I’d give it less than 24 months before we are back in the red.

With a bigger pot to dip into the promises, demands, pay-offs, jobs for the boys and corruption would escalate to another level.

In the bigger picture, legitimately denying politicians and bureaucrats access to greater revenue streams is a good thing. They might learn to live somewhat within the nation’s means.

The political class ‘tut tut’ over the use of these tax havens, yet they have no problem in racking up obscene amounts on travel expenses — $70,000 for a 10 day trip to Europe — with taxpayer money.

The ‘pig in the trough’ example our politicians and ex-politicians set does precious little for the ‘we need to raise taxes’ agenda.

For Australians who don’t have the means to warrant making a phone call with Mossack Fonseca, you may want to take a closer look at the legitimate tax-free haven that exists here in Australia.

For less than $2,000 you can set up a self-managed super fund (SMSF).

An SMSF in the wealth creation phase pays a maximum tax rate of 15% on earnings. This rate can be significantly reduced with the use of fully franked dividends.

An SMSF in pension phase pays ZERO tax on earnings (income and capital gain), and you get to receive a full refund of all franking credits.

Who needs to go the British Virgin Islands when you can have an SMSF?

‘But aren’t they going to change the tax rates on super?’

Most probably. However, my guess is superannuation will still be a tax effective investment vehicle.

Legislative risk is something we all live with.

Even those in tax havens could find cash-starved governments — led by the US and Europe — apply economic pressure to generate a greater level of compliance.

As an example, look at the pressure the US applied to Swiss banks to lift the veil of secrecy.

What we are witnessing from the RBA’s continued accommodative policy, and the leaking of documents, is a system that is under strain.

Central banks desperately need to keep debt coursing through the veins of the economy. And governments need to look under every rock for revenue to pay for unfunded commitments.


Vern Gowdie,
Editor, The Gowdie Letter

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Special Report: Wealth Eruption’: Forget the market downturn…the oil crash…and the debt…There are FOUR unstoppable events that could generate huge wealth for Aussie investors. Starting with one play that could make you a potential 1,068% return in the next 24 months…(more)

Vern is a contributing editor to Money Morning — Australia’s biggest circulation daily financial email. (To have Money Morning delivered straight to your inbox you can subscribe for free here).

Vern has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia's Top 50 financial planners. His previous firm, Gowdie Financial Planning, was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top 5 financial planning firms in Australia.

Vern has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. In his leisure time Vern remains active with triathlons and pilates.

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