THE DISTILLERY: Taxing tales

One jotter explains why shareholders would suffer from a lower company tax rate, while another demands Canberra spending cuts.

With a federal election on the horizon, readers can expect some more ink to be spilled in the national newspapers on the matter of taxation. In this morning’s edition of The Distillery, three columnists are on various taxation issues, including the company tax rate, the entire government’s tax take and international tax minimisation.

Fairfax’s Ross Gittins attacks the assumptions of the business lobby’s campaign for a reduction in the company tax rate, by pointing out the consequence of having a full dividend imputation system.

"The point is simply stated: when the rate of company tax is 30 per cent, the recipients of ‘fully franked’ dividends are entitled to a refundable tax credit worth 30 per cent of the ‘grossed-up’ value of the dividend. So if your marginal tax rate is 46.5 per cent, the extra income tax you have to pay on your grossed-up dividend falls to a net 16.5 per cent. In this way the double taxation of dividends is eliminated. Now let's say the big business lobby succeeds in persuading the government to cut the company tax rate to 25 per cent. With an unchanged dividend, the refundable tax credit falls to 25 per cent and the remaining tax to be paid rises to 21.5 per cent. Only if companies were to respond to the lower company tax rate by increasing their dividend payouts sufficiently would domestic shareholders not see themselves as having been made worse off.”

It’s fairly safe to assume that The Australian’s Judith Sloan might disagree with Gittins. Sloan attacks the assumption made by a number of senior political figures that the Australian government needs to figure out how to generate more revenue in order to maintain current service levels. Here’s a thought, how about we cut spending, says the News Limited writer.

"In international terms, however, Australia looks like a relatively low taxing-low spending country. We are above the US, but similar to Japan and Switzerland. There are a number of countries that extract much higher proportions of their national outputs in taxation. Examples of high taxing-high spending countries include: Denmark, Sweden, Belgium, Norway and France. But as Nigel Ray, one of the executive directors of the Treasury, points out, these comparisons can be misleading. ‘Data on tax revenue or spending can never fully capture the impact government will have on an economy. Most notably, this measure will not account for activity of state-owned enterprises; it hides the use of tax concessions; and it does not capture the impact of government regulations (including mandated superannuation contributions)’.”

The Australian’s Richard Gluyas is also talking tax, with a close examination of Commonwealth Bank’s operations in Malta, a place once blacklisted as a tax haven by the Australian Taxation Office.

"While CBA had a London branch for many years, it was not licensed in a European country and was therefore restricted in its ability to lend into other EU countries. Former chief executive Ralph Norris acknowledged the tax angle, saying Malta ‘certainly does have a lower tax rate, but so do places like Hong Kong, Singapore and the like, and also the offshore banking unit here in Australia’. That was in 2009, but the situation now is that two thirds of the $3 billion in assets held by CommBank Europe, the licensed banking entity, are loans back to CBA. So CBA has capitalised CommBank Europe, which lends $2 billion back to CBA, which pays interest to CommBank Europe in low-tax Malta.”

Meanwhile, The Distillery has to give a shout out to Business Spectator’s Shane White for this beauty in The Last Gasp:

"This week we learned about the point at which the mindless drive for productivity passes the threshold of common sense. Turns out once you’re telling people they are not allowed to sit down, you’ve gone too far. Who would have thought? Leighton Contractors staff at the massive Gorgon project in Western Australia have been on their feet lately, after an edict from on high banning all forms of sitting down. The news follows an announcement from showrunner Chevron recently that Gorgon is facing a 40 per cent cost blowout, with poor productivity a key factor. Clearly a desire to limit financial damage has now surpassed the desire to provide staff with the basic human right of comfort. Workers also raised concerns that power outages and a lack of supervisors often left them unable to complete tasks at all. Without knowing the full facts, it seems that the real productivity problem is staff being forced to just stand around in the dark with no idea what to do. But hey, it’s likely those in charge know best.”

In other company news, Fairfax’s Michael West has secured documents that indicate that the joint venture partner of Intrepid Mines for the gold project on Java has sold the project right out from under Intrepid's feet. It should be said Intrepid is questioning the authenticity of the documents.

In media news, Fairfax’s Colin Kruger makes the observation that his employer’s decision seriously cut its debt with the sale of its remaining holdings in New Zealand’s online trading website TradeMe is hardly unusual. The split at News Corp, the parent company of this website, isn’t saddling the newspaper arm with debt, while Nine Entertainment’s restructure also left it sitting pretty. It’s a good point from Kruger.

Meanwhile, Fairfax’s Adele Ferguson and Michael Idato team up to examine the fallout for advertisers and investors in Southern Cross Media from the 2Day FM prank call scandal.

The Australian Financial Review’s Chanticleer columnist Tony Boyd uses the drastic decline in fortunes for Bookmakers Super Fund, now the worst performing Australian super fund when once it was the best, as a starting point for a discussions about the strength of regulation for the sector. It’s not a pretty tale.

In economics and markets news, The Australian’s Robin Bromby picks up on some comments from StockAnalysis’ Peter Strachan that the gas glut in the US will be a drag on the Australian market, with the exception of US-focused players.

The Australian Financial Review’s David Bassanese says he’s become increasingly outraged by the latest action from the Federal Reserve and hesitantly offers this to his readers: "it suggests Australian authorities might need to start considering – or at least threaten to consider – the once unthinkable: re-imposition of exchange rate controls.”

And speaking of currency, The Australian Financial Review’s Karen Maley says a victory for Japan’s conservative Liberal Democratic Party is expected to put pressure on the Bank of Japan to adopt more aggressive measures to boost the economy and put downward pressure on the yen.

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