RICH PICKINGS: Tax scrap

For the wealthy, a tax scandal can cause serious reputational damage. But your attitude toward tax is often informed by your attitude toward business, which is why the rich square off against the ATO so often.

For a rich person, there are few things more humiliating than being embroiled in a tax minimisation investigation.

Being rich makes you a big enough target in the tall-poppy-slashing Australian community. Being hit with allegations that you are not paying your fair share like the rest of the battlers can make a hole in an entrepreneur’s reputation that no amount of philanthropy can repair.

So it's not hard to understand why Frank Lowy is so angry at being dragged into a US senate investigation into the use of tax havens.

The US Senate Committee on Homeland Security and Governmental Affairs has identified Lowy as a client of LGT Group, the secretive Liechtenstein bank owned by UBS and the Liechtenstein royal family. The committee claimed that the Lowy family used a special foundation vehicle to "hide their beneficial interest in a foundation with $US68 million in assets”. Frank’s son Peter, who is a US citizen, was called to give evidence before the committee.

Lowy, who is also being audited by the Australian Taxation Office over the LGT accounts, has strenuously denied the allegations, but that has done little to quell the media interest in Australia, the US and Europe – where Lowy’s Westfield property group in one of the biggest players in the shopping centre sector.

Of course, Lowy is just one of a number of wealthy Australian entrepreneurs to become involved in tax battles with the ATO (Lowy previously settled a $25 million dispute with the ATO in 1995). Here is a selection of recent battles:

– Perth coal baron Ric Stowe is still embroiled in a decade-long battle with the ATO over a $173 million claim. Stowe's personal wealth was valued at $875 million on this year’s Rich 200.

– In May, 99-year-old Dame Elisabeth Murdoch won her appeal in an $85 million dispute with the ATO that dated back to 1994.

– Gold Coast developer Craig Gore was taken to court in November last year over a $27,000 income tax bill.

– In 2005, revelations of a tax dispute between the ATO and Adelaide businessman Robert Gerard cost him his place on the board of the RBA.

– Paul Hogan and business partner John 'Strop' Cornell have been involved in a running war with the ATO for many years. Earlier this month, Hogan joked he felt "honoured” to be chased by the ATO and the Internal Revenue Service in the US. "As a guy who brought millions into Australia, they should build a statue at the tax office of me and send me a Christmas card,” Hogan said.

– Music promoter Glenn Wheatley was convicted of tax fraud in 2007 and jailed as part of the ATO’s Operation Wickenby investigation into offshore tax schemes. The ATO claimed a big scalp, but not everyone though he should go to jail. "I know the people of Australia sleep well knowing Glenn Wheatley's off the street,” Paul Hogan said.

– Kerry Packer fought numerous battles with the taxman over three decades and did nothing to hide his hatred of paying tax. In 1991, he famously told a nationally-televised parliamentary inquiry that "anybody in this country that doesn't minimise their tax want their heads read because as a government I can tell you you're not spending it that well that we should be donating extra”.

So how do wealthy entrepreneurs end up in these tax battles?

Unfortunately for the rich, they are highly visible targets for the taxman. In Australia’s relatively small business community, every major deal is reported and dissected by the media, so the ATO can get a fair handle on who should be paying what. To make matters worse for the rich, the ATO gets a handy guide to the status of their fortunes delivered to them every year in May in the form of the BRW’s Rich 200. Legend has it – which I have no reason to doubt – that the ATO gets two boxes of the magazine delivered every year.

Secondly, the rich are a highly profitable target for the ATO. As the federal government’s key revenue raising agency, the pressure is on the ATO to get the biggest return from its limited resources. It is far better to audit one billionaire than chase 10,000 workers on the minimum wage.

Thirdly, the rich can occasionally be preyed upon by lawyers and accountants willing to push the tax envelope and win and/or retain the business of a super-wealthy client. Do a good job minimising the tax of a big fish and you’re a good chance to win jobs doing their company accounts, their charitable foundation’s accounts, their wife’s accounts and their kid’s accounts.

It is often smaller firms who, in their desperation to win business, come up with the most aggressive tax strategies. One tax accountant I spoke to says the conversation with the wealthy client will generally involve the presentation of a number of options. "This is the safe, conservative strategy, sir. This strategy…well, that’s getting into a little bit of a grey area.”

But as any tax agent will tell you, the final decision always lies with the client. And despite the fact that they know the ATO is watching their every move, plenty of wealthy entrepreneurs are prepared to roll the dice and pursue aggressive minimisation strategies such as using offshore tax havens and complex financial vehicles.

For some – like Kerry Packer – it’s a matter of principle to make sure the taxman gets as little as possible.

But for most, it’s just another multi-million dollar business decision, not unlike a making a hostile takeover or outbidding your rivals for a property. There are costs and risks associated with being wrong and there can be big rewards attached to being right.