Guatemala_Sinkhole 2007

With the Federal Budget to be handed down in a matter of hours, and with today’s housing finance figures revealing more of the same:

  • investors at 39.1% of all loans
  • FHO’s nationally plateauing at 12.6%, up 0.1%
  • NSW FHO’s at just 8.5% and borrowing on average $320,800,

We note with interest the PM’s call on economic literacy, that “The public will respect us for this budget even if there’s parts of it they don’t like”.

The core question is – how many people have been listening to groups like Prosper, advocating for awareness on the mobility of capital when it comes to taxation of income? Is it the most effective source for government revenue?

Peter Martin’s following article could well have been called the hole in our tax system. Further such behaviour identified in the last paragraph will only be encouraged by tonight’s budget:

“Pain all round” will be the rallying cry of the night. Joe Hockey says his first budget – tonight – will hit everyone from high earners to politicians to Australians too poor to pay to see the doctor. All of us will have to “contribute budget repair”.

Except that we won’t.

The latest tax statistics show 75 ultra-high-earning Australians paid no tax at all in 2011-12. Zero. Zip.

Each earned more than $1 million from investments or wages. Between them they made $195 million, an average of $2.6 million each.

The fortunate 75 paid no income tax, no Medicare levy and no Medicare surcharge, even though 60 of them had private health insurance.

The reason? They managed to cut their combined taxable incomes to $82. That’s right, $1.10 each.

Cutting taxable income that far doesn’t come cheap.

Forty-five of the uber millionaires claimed a total of $64.4 million for the “cost of managing their tax affairs”. That’s a staggering $1.4 million each. (As a point of comparison an entry-level H&R Block consultation costs $49.)

At face value the figures suggest these super-high earners were prepared to spend an unlikely half of their incomes on tax advice. A more likely explanation is that they received far greater incomes than they reported and spent only a portion on tax advice.

It wasn’t wasted.

Ten of the millionaires claimed between them $1.3 million in work-related deductions, for things such as car expenses and clothing. Ten claimed a total of $5 million for donations and gifts, a category that includes political as well as charitable donations.

And they ran loss-making businesses.

The 30 who were in business reported total business income of $121 million offset by expenses of $122 million. Those who ran farms carried over $61.5 million in earlier tax losses and lost an extra $3 million in 2011-12.

When it came to investing they bought up big on shares that paid so-called franking credits on which they could claim tax deductions and stayed away from those that did not. They received $18.7 million in franked dividends in 2011-12, and only $565,000 in dividends that were unfranked.

On Tuesday night these  75 will escape the deficit reduction levy applying to taxable incomes of more than $180,000. Their taxable incomes are closer to nil than $180,000 even though they are well off enough to afford outrageously priced tax advice. And they’ll almost certainly escape the extra charge for bulk-billed visits to the doctor. About the only thing they won’t escape is higher petrol prices, although it should be noted that five of them claim work-related car expenses, so they might be able pass those costs on to the Tax Office.

It isn’t only millionaires. Tax Office figures show there are 1095 Australians earning in excess of $150,000 who pay no tax. Half of them sought tax advice and shelled out an impressive total of $98 million, which works out to $223,000 each. Their biggest lurk is negative gearing. Most lose large sums on properties they rent out in order to destroy their taxable incomes, hoping to make it up later when they sell the properties for a lightly taxed profit.

With the looming deficit levy to encourage further land speculation via negative gearing, one can expect more blame shifting by politicians of all persuasions. Only when they squarely address the incredible capital gains in land and licensed monopolies will the pressures on welfare and health expenditures reduce.

We remind that all Australian residential landowners benefitted from capital gains totalling almost half of all three levels of government expenditure in just three months ($184bn, Dec 2013). Today the ABS released their most current version of those figures, finding that house prices (read land) increased only by $112.6bn in three months.

Over the last 12 months, the value of dwelling stock has increased by $484.395bn. All three levels of government require circa $390bn to operate. This land price windfall is an entitlement whose day will soon come.