Opinions on taxation loopholes in Australia Essay Example

  • Category:
    Law
  • Document type:
    Essay
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    Undergraduate
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    3
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    2029

Opinions on taxation loopholes in Australia

Opinions on taxation loopholes in Australia

During the past decade, shifts in the global economy such as increased internationalisation of firms have piled pressure on tax systems across the globe, as well as in Australia, due to increased need to increase profits. The key motivators for globalisation have included higher levels of labour mobility, technological shifts, and technological shifts. These multinational corporations function in many countries with a considerable amount of their value being intangible while the place the value is added is not easy to determine1. At the same time, the digital economy has facilitated greater levels of importation of commodities. This has strained the indirect tax bases. Given that the capital mobility increases, the Australian government’s high corporate tax rate may discourage investment, eventually resulting to lower wage rates and prosperity2. At the same time, highly efficient marginal tax rates may as well prevent the workforce from participating or even lead to tax avoidance activities, since people will often be motivated to cut their tax burdens. Tax avoidance is a great problem in an OECD country like Australia where tax revenues is nearly 35 percent of the GDP. Some observers have argues that it is unfair that taxpayers do exploit taxation loopholes in Australia taxation system to minimise taxes and that they need to be penalised and by the Governments3. In my opinion however, there are legal loopholes exist and it is the Government’s failure as the taxpayers are not doing something illegal.

Exploiting the taxation loopholes amounts to tax avoidance, which in turn means that the taxpayer uses legal means or mechanism to reduce imminent tax liability, such as b y paying a smaller amount tax, as found in the case law of FCT v. Westgarth (1950) 81 CLR 396 at 414. The practice is an outcome of tax planning, which describes the process of exploiting tax concessions. In my view therefore, taxation loopholes are likely to be exploited as part of a firm’s corporate governance strategy. For this reason, corporations may need to reduced tax liability using «tax planning» efforts by leveraging the tools and mechanisms the government uses to make use of deductions, allowances, exemptions, and rebates. Generally speaking, tax planning is a tax-compliant practice4. Still, there exists a grey area «tax avoidance» and tax planning. Tax avoidance is legal and entails the use financial arrangements and instruments that are not planned for by the governments as a means to achieve taxation advantage. This includes the use of tax havens overseas. Avoidance of taxes and manipulating the taxation system rules is not actually illegal as tax evasion.

It could further be reasoned that when the taxation regimes cannot adequately check against tax avoidance, it can result to a vicious cycle of tax evasion practice. Ultimately, the Australian government loses a huge level of tax revenue. At any rate, tax avoidance is mainly due to lack of compliance with tax regulations, which lead to decreased readiness to pay taxes. The second contributing factor is the weak regulation or weakened capacity of tax administration to put tax liabilities in force. The two causal factors can be summed up as emanating from the failures of the government to administer and collect taxes, as well as audit and monitor tax payments that reduce the likelihood to detect and take legal action against violators5.

Such developments create important issues for taxation systems as they lead to the weakened capacity of the taxation systems to generate revenues from the traditional taxation bases. In addition, they increase the taxation costs, and weaken economic growth. Statistics by the Australian Taxation Office (ATO) indicate that close to one-third of the top 1500 companies in Australia failed to pay tax during the 2013-2014 fiscal year. Similarly, some 600 of the multinational corporations in Australia failed to pay income tax during the same fiscal year. Mostly, these are wealthy corporations that when they avoid tax lead the federal government to miss out on some AUS$8.4 billion dollars of taxation annually6. What is ironic is that they use purely legal mechanism to avoid taxes, with most of these mechanisms a result of the government’s failure. The taxes can be a burden, leading to lower profits. When a company fails to make profit. I believe it is justifiable to use purely legal means to make deductions that can cut its taxable income. Because of the huge revenues at risk, it’s logical for the Tax Office to be proactive in filling the loopholes. For instance, companies may use prior year losses to subtract losses from a preceding fiscal year from its taxable income during the present fiscal year, it may also earn tax credits on the money it spends on research and development7. Additional options include franking credits, where a corporation gets to counterbalance the tax liability against the dividends paid to the shareholders.

Additionally, since a majority of these tax deduction strategies are legal, the penalties that can be imposed on those found guilty of tax avoidance are not deterrent. This only shows that the government anti- tax avoidance mechanisms are not effective. Therefore, to a typical modern-day multinational corporation (MNC), tax evasion has become an everyday as well as an important part of the modern-day business practices. While such practices continue to gain substantial public criticism globally, several corporate leaders have showed extraordinary indifference towards their tax avoidance practices. Due to these reasons, in instances where the federal government fails to clearly state that tax evasion is illegal, it would not be wrong. Indeed, the director’s fiduciary duties to the shareholders may demand that corporations take part in tax evasion practices to reduce tax burden. When such an attitude prevails in all business sectors, companies are more likely to take part in tax evasion practices. A key disadvantage, in my view, is that tax avoidance can harm a company alongside its shareholders as they damage the company’s reputation. At the same time, it may inflict additional costs on the people, who are outside the company, specifically other taxpayers who will need to carry the entire burden. For these reasons, it is clear that it is government which is at fault.

Next, existence of the legal loopholes is a result of the Government’s failure as the tax avoidance practices by the taxpayers is not illegal. In my view, if the government had effective anti-avoidance legislations in place, exploiting the taxation loopholes would be difficult. The result would be greater rate of revenue generation by the federal government8. In Australia for instance, the government has during the recent decades attempted to counteract the tax avoidance strategies of the day by coming up with legislations targeted at certain tax avoidance schemes that are mass-marketed or even practiced by individual taxpayers. Examples of anti-avoidance regimes include the regulations requiring that trading be in terms of franking credits, which entails purchase and sale of shares with the view of claiming the franking credits yet without having to hold on to them over a prolonged period that allows one to bear the ownership risks9. Second regulations involve those of personal services income, where income individual earn through personal efforts becomes diverted into different entities that have lower tax rates. Additional anti-avoidance regimes include the foreign income deferral, where multinational corporations, such as Chevron, ExxonMobil and Shell, have to accumulate income within countries that have lower levels of tax rates10. Other include imposing taxes on company losses, which makes it difficult for companies to makes claims before annual losses except for when the majority of the ownership remains unchanged of even when a similar business activity is undertaken. In certain cases also, the government may impose taxes of minors. These are actually punitive tax rates intended for individual under the age of 18 years of age to check against practices where income becomes streamed to the children as they are charged lower tax rates11.

In addition to the anti-avoidance regimes that touch on particular activities, the tax rules also have general anti-avoidance rules dubbed Part IVA of the Income Tax Assessment Act 1936 (Cwlth), which suggests that when a person is viewed to have done something while intending to get a ‘tax benefit,’ then the person loses the tax benefit. Essentially, the legislation is applicable to tax avoidance, where even a person who is a law-abiding may still be apprehended for a crime when he has engaged in action where the tax reasons overrule other reasons.

In conclusion, it becomes clear that the government can only work to seal the loopholes in the taxation systems, such as by introducing more stringent anti-tax avoidance measures. When a company fails to make profit, it is justifiable to use purely legal means to make deductions that can cut its taxable income. It is clear that it is government which is at fault. Existence of the legal loopholes is a result of the Government’s failure as the tax avoidance practices by the taxpayers is not illegal. If the government had effective anti-avoidance legislations in place, exploiting the taxation loopholes would be difficult. For this reason therefore, existence of the legal loopholes is a result of the Government’s failure as the tax avoidance practices are not illegal.

Bibliography

ABC.Net. “How do a third of the top Australian companies pay no tax?” ABC News, posted May 2014, accessed Jan 2, 2016 <http://www.abc.net.au/triplej/programs/hack/a-third-of-top-australian-companies-pay-no-tax-ato-figures-show/7038232>

Barry Dunning, «Royal Commission into tax loopholes a must,» ABC News, posted 29 Dec 2014, accessed 2 Jan 2016, <
http://www.abc.net.au/triplej/programs/hack/a-third-of-top-australian-companies-pay-no-tax-ato-figures-show/7038232>

Bill Shorten and Andrew Leigh, “Australia’s stance on tax avoidance out of step, says Bill Shorten,” The Sydney Morning Herald, posted 26 May 2014, accessed Jan 2, 2016 <http://www.smh.com.au/comment/australias-stance-on-tax-avoidance-out-of-step-says-bill-shorten-20141030-11ea47.html>

David Crow, “Australia lags on program to close tax loopholes,” The Australian, posted 20 Sept 2014, accessed Jan 2, 2016, http://www.theaustralian.com.au/business/in-depth/g20/australia-lags-on-program-to-close-tax-loopholes/news-story/5c679c9ccb2d0a106a0a469e6c6f5ed2

James Chessell, «Close tax loopholes, urges OECD,» The Sydney Morning Herald, posted 14, March 2014, accessed 2 Jan 2016, <http://www.smh.com.au/business/world-business/close-tax-loopholes-urges-oecd-20140314-34qwn.html>

Leon Spencer, “Australia reaches tax loophole crackdown deal,’ ZDnet, posted 20 April 2015, accessed 2 Jan 2015, <
http://www.zdnet.com/article/australia-reaches-tax-loophole-crackdown-deal-with-uk/>

Lisa Cox, «Tax transparency: Crack down on big companies before cutting welfare, say crossbenchers,» The Sydney Morning Herald, posted 18 Dec 2015, accessed 2 Jan 2015, < http://www.smh.com.au/federal-politics/political-news/tax-transparency-crack-down-on-big-companies-before-cutting-welfare-say-crossbenchers-20151218-glqxhz.html>

Michael Janda, «Tax avoidance: why not name and shame?» ABC Net, posted 26 May 2014, accessed Jan 2, 2016, <http://www.abc.net.au/news/2014-05-26/janda-tax-avoidance-name-and-shame/5478450>

Neil Chenoweth, “Tax Move would close Chevron, ExxonMobil and Shell’s $3 billion loophole,» AFR Weekend, posted 18 Aug 2015, accessed 2 Jan 2015, < http://www.afr.com/news/policy/tax/tax-move-would-close-chevron-exxonmobil—shells-3b-loophole-20150817-gj0z66>

Saul Eslake, “GST Reform can be Achieved by closing other tax loopholes,» AFR Weekend, posted 22 sep 2015, accessed Jan 2, 2016, <
http://www.afr.com/opinion/gst-reform-can-be-achieved-by-closing-other-tax-loopholes-20150922-gjsdcv>

1
Neil Chenoweth, “Tax Move would close Chevron, ExxonMobil and Shell’s $3 billion loophole,» AFR Weekend, posted 18 Aug 2015, accessed 2 Jan 2015, < http://www.afr.com/news/policy/tax/tax-move-would-close-chevron-exxonmobil—shells-3b-loophole-20150817-gj0z66>

2
David Crow, “Australia lags on program to close tax loopholes,” The Australian, posted 20 Sept 2014, accessed Jan 2, 2016, http://www.theaustralian.com.au/business/in-depth/g20/australia-lags-on-program-to-close-tax-loopholes/news-story/5c679c9ccb2d0a106a0a469e6c6f5ed2

3
James Chessell, «Close tax loopholes, urges OECD,» The Sydney Morning Herald, posted 14, March 2014, accessed 2 Jan 2016, <http://www.smh.com.au/business/world-business/close-tax-loopholes-urges-oecd-20140314-34qwn.html>

4
ABC.Net. “How do a third of the top Australian companies pay no tax?” ABC News, posted May 2014, accessed Jan 2, 2016 <http://www.abc.net.au/triplej/programs/hack/a-third-of-top-australian-companies-pay-no-tax-ato-figures-show/7038232>

5
Bill Shorten and Andrew Leigh, “Australia’s stance on tax avoidance out of step, says Bill Shorten,” The Sydney Morning Herald, posted 26 May 2014, accessed Jan 2, 2016 <http://www.smh.com.au/comment/australias-stance-on-tax-avoidance-out-of-step-says-bill-shorten-20141030-11ea47.html>

6
ABC.Net. “How do a third of the top Australian companies pay no tax?” ABC News, posted May 2014, accessed Jan 2, 2016 <http://www.abc.net.au/triplej/programs/hack/a-third-of-top-australian-companies-pay-no-tax-ato-figures-show/7038232>

7
Michael Janda,»Tax avoidance: why not name and shame?» ABC Net, posted 26 May 2014, accessed Jan 2, 2016, <http://www.abc.net.au/news/2014-05-26/janda-tax-avoidance-name-and-shame/5478450>

8
Saul Eslake, “GST Reform can be Achieved by closing other tax loopholes,» AFR Weekend, posted 22 sep 2015, accessed Jan 2, 2016, < http://www.afr.com/opinion/gst-reform-can-be-achieved-by-closing-other-tax-loopholes-20150922-gjsdcv>

9
Lisa Cox, «Tax transparency: Crack down on big companies before cutting welfare, say crossbenchers,» The Sydney Morning Herald, posted 18 Dec 2015, accessed 2 Jan 2015, < http://www.smh.com.au/federal-politics/political-news/tax-transparency-crack-down-on-big-companies-before-cutting-welfare-say-crossbenchers-20151218-glqxhz.html>

10
Leon Spencer, “Australia reaches tax loopjole crackdown deal,’ ZDnet, posted 20 April 2015, accessed 2 Jan 2015, < http://www.zdnet.com/article/australia-reaches-tax-loophole-crackdown-deal-with-uk/>

11
Barry Dunning, «Royal Commission into tax loopholes a must,» ABC News, posted 29 Dec 2014, accessed 2 Jan 2016, < http://www.abc.net.au/triplej/programs/hack/a-third-of-top-australian-companies-pay-no-tax-ato-figures-show/7038232>