Monday, November 16, 2009
Myer, Australian Taxation Office bumbling, and clueless journalism
The name “Myer” has long been familiar to anyone who has studied Australian tax law. Five years before Mabo in 1992, the High Court more or less “did a Mabo” – that is, made a decisive break with the past, so as to achieve a just result.
While Mabo involved combing through 210 years of documentation, none of which included a High Court direct precedent, Federal Commissioner of Taxation v Myer Emporium Ltd set up a dramatic break with the recent past – a big, pointed “f* you” to the golden days of tax avoidance under the Barwick High Court (Garfield Barwick retired as Chief Justice in 1981, the same year as the disputed transaction in Myer Emporium took place), and even more recently, a bit of a whack also to Barwick fellow-traveller, Harry Gibbs, who was in the process of being eased out as Chief Justice as the Myer Emporium case was heard in 1987.
Unfortunately for Australian taxpayers, history doesn’t seem likely to repeat this time around, with ATO bumbling meaning that Myer vendor TPG’s billion-plus capital gain – a fact, if not exact sum, well telegraphed in advance by every broadsheet in the land – was out of the country before it decided to act.
On the other hand, the ATO could be forgiven for some confusion if it relied on our broadsheets for guidance on capital gains tax. I’m not expecting journos necessarily to be experts on this specialist and intricate area of law (which I have lectured in), but knowing the broad-brush basics should be mandatory.
According to the Australian’s Andrew Main and Susannah Moran, relying largely on Professor Michael Dirkis (a former colleague of mine):
"The ATO action brings to a head a long-running battle it has had with overseas investors, exacerbated until December 2006 by a number of loopholes in Australian law, and by the ATO's constant problems in getting money from foreign jurisdictions.
From about 1997, said University of Sydney Michael Dirkis professor of taxation, 'it became very optional for foreign investors in Australia to pay capital gains tax on their profits' . . . Professor Dirkis, who said it was usual to use a Dutch entity because the Netherlands had one of the lowest withholding taxes on capital transfers, expressed no surprise at the structure, but predicted the case would test a December 2006 revamp of the CGT rules. Swanston bought the Myer assets six months before that date.
'Under the old rules, if you were not disposing of an Australian asset, you were not liable for CGT,' he said, noting that had been an ongoing gap in the CGT rules for years. The 2006 revamp, which to the best of his knowledge has not yet been tested, claims CGT even if companies are selling an indirect interest in an Australian company'".
Sounds plausible enough (because I haven’t studied or taught the 2006 CGT changes, I offer not personal expertise here) – a loophole that lasted a decade or so, a la the Barwick High Court’s licensed tax avoidance, followed by probably useless (I think this is safe to assume, if three years on, it hasn’t been tested even once) 2006 “closing” of the loophole.
A quite different angle on the 2006 CGT changes, however, was that of the Age’s Ian McIlwraith, writing on the same day as the Oz’s Andrew Main and Susannah Moran. McIlwraith opines:
"What confounds the tax experts is that under amendments in 2006 to the levying of capital gains tax, there is now an exemption if the first holding company is incorporated offshore, with Australia agreeing to allow that shareholder to be taxed in its country of incorporation, in this case the Netherlands".
That is, according to McIlwraith, the Howard government – rather astonishingly, in my opinion – “did a Barwick” in 2006, forgoing all CGT revenue that would otherwise arise from Australian-nexus transactions, providing that the vendor was incorporated elsewhere.
As Paul Hogan could well say – “You call THAT a loophole? THIS is a loophole!”. And Garfield Barwick would be proud, too – the good work of the Mason High Court 20 years ago now seems to amount to no more than some 18th C letters patent, destined for a 200-year+ obscurity, before perhaps the Mason legacy will also be dusted off and used as a prize exhibit by another tribunal circa 2200.
Update 6 December 2009
The plot thickens. Subsequent coverage in the Australian has veered from the those-ATO-hicks-are-scaring-off-foreign-investors angle to a (belated) forensic unpicking of TPG’s chain of ownership in yesterday’s Oz, showing some distinctly sloppy – perhaps even to the point of being legally smelly – paperwork on TPG’s part.
A question no commentator seems to have thought too much about is: Who ran Myer in the 3½ years TPG owned it? Maybe the chain of stores simply ran itself, and TPG, as no more than a passive investor, fortuitously – and quite accidentally, of course – made a huge profit. The difference between running an (Australian) business, vs being a passive investor in the same, matters hugely because profits made through the former are taxed in Australia irrespectively of the taxpayer’s domicile, while the latter type of profit – aka capital gain – is not taxed in Australia if the taxpayer is a non-resident (as of course TPG made sure it was).
Some confusion arises because there are two ways of pinning TPG to the running of an Australian business – statutory CGT law and case law. Re the former:
“Michael Dirkis, professor of taxation at Sydney University, said ‘there were three criteria devised in 2006 to catch higher levels of CGT . . . but it's the third that the ATO appears to be relying on. It says CGT is payable on any asset used to carry on a business through a permanent establishment in Australia. If you have a workshop, or a factory, or an office [or a chain of shops], that may apply.’”
Contrary to what I wrote in my original post, and now after having combed through the 2006 changes, I fail to see that these changes in any way enhanced CGT revenue – the opposite seems to be the result, and certainly the legislative intent. However, what happened in 2006 is important here for what didn’t change then – and the carrying on of a business through a permanent establishment in Australia remained a statutory trigger for non-resident CGT liability both before and after 2006.
Separately, as I alluded to in my original post, there is a body of case law, admittedly much of which predates the introduction of CGT in 1985, which takes an expansive view of how what may loosely be called “windfall profits” can be categorised as arising from running a business, and so taxable as ordinary income. It now seems clear (but wasn’t at the time of my original post), that it is this particular tack that the ATO is pinning its hopes on.
So was TPG running a shop? Such duties would be far too pedestrian for the financial-engineering whizzes, seems to the argument here:
“One industry adviser suggested that it seemed as though the ATO also didn't understand how the industry worked. ‘TPG is making millions of dollars for investors in their underlying funds. Those investors include pension funds, including Australian super funds, family offices, banks. It's not like (the late) Kerry Packer has gone and made a billion dollars. TPG was the management company, which was managing that process. It's not a corporate, it's a manager of money.’”
Admittedly, double-taxation – of both ultimate investors and TPG entities – seems to follow from the ATO’s approach. TPG’s alternative claim is more starkly ludicrous, however – it necessitates a belief that for those 3½ years nobody – nobody – was minding the shop.
Whether, over the same space of time, anyone was minding the ATO is a less absurd, and rather harder to answer question.
The name “Myer” has long been familiar to anyone who has studied Australian tax law. Five years before Mabo in 1992, the High Court more or less “did a Mabo” – that is, made a decisive break with the past, so as to achieve a just result.
While Mabo involved combing through 210 years of documentation, none of which included a High Court direct precedent, Federal Commissioner of Taxation v Myer Emporium Ltd set up a dramatic break with the recent past – a big, pointed “f* you” to the golden days of tax avoidance under the Barwick High Court (Garfield Barwick retired as Chief Justice in 1981, the same year as the disputed transaction in Myer Emporium took place), and even more recently, a bit of a whack also to Barwick fellow-traveller, Harry Gibbs, who was in the process of being eased out as Chief Justice as the Myer Emporium case was heard in 1987.
Unfortunately for Australian taxpayers, history doesn’t seem likely to repeat this time around, with ATO bumbling meaning that Myer vendor TPG’s billion-plus capital gain – a fact, if not exact sum, well telegraphed in advance by every broadsheet in the land – was out of the country before it decided to act.
On the other hand, the ATO could be forgiven for some confusion if it relied on our broadsheets for guidance on capital gains tax. I’m not expecting journos necessarily to be experts on this specialist and intricate area of law (which I have lectured in), but knowing the broad-brush basics should be mandatory.
According to the Australian’s Andrew Main and Susannah Moran, relying largely on Professor Michael Dirkis (a former colleague of mine):
"The ATO action brings to a head a long-running battle it has had with overseas investors, exacerbated until December 2006 by a number of loopholes in Australian law, and by the ATO's constant problems in getting money from foreign jurisdictions.
From about 1997, said University of Sydney Michael Dirkis professor of taxation, 'it became very optional for foreign investors in Australia to pay capital gains tax on their profits' . . . Professor Dirkis, who said it was usual to use a Dutch entity because the Netherlands had one of the lowest withholding taxes on capital transfers, expressed no surprise at the structure, but predicted the case would test a December 2006 revamp of the CGT rules. Swanston bought the Myer assets six months before that date.
'Under the old rules, if you were not disposing of an Australian asset, you were not liable for CGT,' he said, noting that had been an ongoing gap in the CGT rules for years. The 2006 revamp, which to the best of his knowledge has not yet been tested, claims CGT even if companies are selling an indirect interest in an Australian company'".
Sounds plausible enough (because I haven’t studied or taught the 2006 CGT changes, I offer not personal expertise here) – a loophole that lasted a decade or so, a la the Barwick High Court’s licensed tax avoidance, followed by probably useless (I think this is safe to assume, if three years on, it hasn’t been tested even once) 2006 “closing” of the loophole.
A quite different angle on the 2006 CGT changes, however, was that of the Age’s Ian McIlwraith, writing on the same day as the Oz’s Andrew Main and Susannah Moran. McIlwraith opines:
"What confounds the tax experts is that under amendments in 2006 to the levying of capital gains tax, there is now an exemption if the first holding company is incorporated offshore, with Australia agreeing to allow that shareholder to be taxed in its country of incorporation, in this case the Netherlands".
That is, according to McIlwraith, the Howard government – rather astonishingly, in my opinion – “did a Barwick” in 2006, forgoing all CGT revenue that would otherwise arise from Australian-nexus transactions, providing that the vendor was incorporated elsewhere.
As Paul Hogan could well say – “You call THAT a loophole? THIS is a loophole!”. And Garfield Barwick would be proud, too – the good work of the Mason High Court 20 years ago now seems to amount to no more than some 18th C letters patent, destined for a 200-year+ obscurity, before perhaps the Mason legacy will also be dusted off and used as a prize exhibit by another tribunal circa 2200.
Update 6 December 2009
The plot thickens. Subsequent coverage in the Australian has veered from the those-ATO-hicks-are-scaring-off-foreign-investors angle to a (belated) forensic unpicking of TPG’s chain of ownership in yesterday’s Oz, showing some distinctly sloppy – perhaps even to the point of being legally smelly – paperwork on TPG’s part.
A question no commentator seems to have thought too much about is: Who ran Myer in the 3½ years TPG owned it? Maybe the chain of stores simply ran itself, and TPG, as no more than a passive investor, fortuitously – and quite accidentally, of course – made a huge profit. The difference between running an (Australian) business, vs being a passive investor in the same, matters hugely because profits made through the former are taxed in Australia irrespectively of the taxpayer’s domicile, while the latter type of profit – aka capital gain – is not taxed in Australia if the taxpayer is a non-resident (as of course TPG made sure it was).
Some confusion arises because there are two ways of pinning TPG to the running of an Australian business – statutory CGT law and case law. Re the former:
“Michael Dirkis, professor of taxation at Sydney University, said ‘there were three criteria devised in 2006 to catch higher levels of CGT . . . but it's the third that the ATO appears to be relying on. It says CGT is payable on any asset used to carry on a business through a permanent establishment in Australia. If you have a workshop, or a factory, or an office [or a chain of shops], that may apply.’”
Contrary to what I wrote in my original post, and now after having combed through the 2006 changes, I fail to see that these changes in any way enhanced CGT revenue – the opposite seems to be the result, and certainly the legislative intent. However, what happened in 2006 is important here for what didn’t change then – and the carrying on of a business through a permanent establishment in Australia remained a statutory trigger for non-resident CGT liability both before and after 2006.
Separately, as I alluded to in my original post, there is a body of case law, admittedly much of which predates the introduction of CGT in 1985, which takes an expansive view of how what may loosely be called “windfall profits” can be categorised as arising from running a business, and so taxable as ordinary income. It now seems clear (but wasn’t at the time of my original post), that it is this particular tack that the ATO is pinning its hopes on.
So was TPG running a shop? Such duties would be far too pedestrian for the financial-engineering whizzes, seems to the argument here:
“One industry adviser suggested that it seemed as though the ATO also didn't understand how the industry worked. ‘TPG is making millions of dollars for investors in their underlying funds. Those investors include pension funds, including Australian super funds, family offices, banks. It's not like (the late) Kerry Packer has gone and made a billion dollars. TPG was the management company, which was managing that process. It's not a corporate, it's a manager of money.’”
Admittedly, double-taxation – of both ultimate investors and TPG entities – seems to follow from the ATO’s approach. TPG’s alternative claim is more starkly ludicrous, however – it necessitates a belief that for those 3½ years nobody – nobody – was minding the shop.
Whether, over the same space of time, anyone was minding the ATO is a less absurd, and rather harder to answer question.
