Shading the Truth on Taxation

For those who fell asleep during the "super tax" debate... Agamedes provides insight.

Do you need new -- lateral -- thinking for your own problems? email nick leth at gmail dot com. Need solutions? No worries. Now.

First, there is business, and it is taxed. But there is a cost to running a business -- essential costs incurred in order to earn income. So business is taxed on profit: income less expenses.

There are expenses and there are tax-deductible expenses. Every business attempts to define all of its expenses as being "tax-deductible". Tax-deductible expenses up, so taxable income is down, so tax paid is less. Here's a simple example:

• A man owns investment property. He employs his sons to do maintenance work on the properties. The sons ask for a swimming pool for the home property. The man pays his sons -- as employees -- a bonus for their work on the investment properties. The bonus is calculated to keep the sons below the income threshold for paying tax. The sons use the bonus to pay for a swimming pool for the home property.
  
• Financial implications: The man has paid a bonus to his employees -- a tax-deductible payment, so the man's tax bill is reduced. The sons' incomes are low enough to ensure that they pay no tax. A household expense -- payment for a home swimming pool -- has been converted to a tax-deductible expense. The man pays less tax.
  

This man puts a lot of effort into minimising the tax that he pays. The more money, time or employees that you have, the more effort you can put into converting expenses into tax-deductible expenses. So the richer you are, the less tax you pay.

The other way to reduce your tax is to reduce your income.

Most people use their income to pay for essential items such as food, shelter, clothing... The very rich -- those who control rich businesses -- don't need an income. The business -- under their control -- will happily provide meals, accommodation, clothing... All essential for a successful business, of course, so all tax-deductible. But it's not income, either, so the very rich have very little taxable income.

Both individuals and businesses take active steps to minimise the tax that they pay. They increase tax-deductible expenses. They reduce taxable income. The bigger the business, the less the tax paid as a percentage of turnover...

Which is all fine, legal, legitimate... Where an individual employee may pay nearly half of their gross earnings in tax, a company (or a rich business owner) may pay far less.

Mining Industry Shades of Truth

There's a full-page ad in The West on 27 May 2010. The ad is from the Minerals Council of Australia. The ad shows various percentages of tax paid. Highlighted figures are, "the actual figure" of 41.3% and "after the 'Super Tax'" 57%.

57% of what?!

That would be 57% of taxable income as declared to the tax office. 57% of income after every effort has been made to minimise taxable income. 57% of an amount which is only a fraction of the annual turnover of mining companies.

If an employee paid tax at that rate it would be 57% of everything. For a business, we really need to know: 57% of what?

Government Shades of Truth

So where did this new "super tax" come from? From the federal government, of course. But why?

Mining companies pay business income tax -- to the federal government. They also pay mining royalties -- to state governments. So mining benefits both state and federal governments.

Mining benefits both state and federal governments? We can't have that! By allowing a state government to earn royalty (tax) money, the federal government is losing power. How can federal control state, when the state is independently wealthy? (No, forget about negotiation and good will. Neither apply. This is a political power play.)

Every business -- including mining -- pays federal taxes. Every business -- including mining -- actively minimises the tax that it pays. Only mining also pays a mining royalty to the state governments. That's why the mining industry is the target of the new tax.

The new tax is not a punishment for the profits of the mining industry. It is a money grab for federal government, it is punishment for paying taxes to state government.

Is it a coincidence that WA is Liberal, that federal is Labor? No. Is it a coincidence that WA has a booming mining industry? No. Is it a coincidence that WA failed to bow down to federal pressure over health "reforms"? Probably not.

The federal government shades the truth, as it hits out with a spiteful new tax. The mining industry shades the truth, as it hits back.

Truth in government? Truth in business? You must be joking.

Independent thinking & independent analysis of your problems by Agamedes Consulting. Support for your thought: email nick leth at gmail dot com