I don’t earn a million dollars in income per year.
(If my bosses are reading this, I am willing to. You have my bank details.)
However, after reading about 60 people who earned more than $1 million yet paid no tax in 2019-20, I investigated how I might do the same.
What if I could manage my tax affairs down to zero, or perform something like a “double Irish Dutch sandwich” and move my coin between low-tax jurisdictions?
So I hired an expert.
(Well, I bought the coffee. That $5 was a lot lower than the usual hourly rate of a person we’ll call “Charlie”).
My expert is a partner at a large consulting firm who has worked with multinational companies on how to structure their affairs so they can operate from countries with lower tax rates, or transfer profits from one part of the world to another.
The structures Charlie has helped set up are completely above board, but contentious.
Sometimes, tax authorities have questioned and even launched legal cases, alleging the structures are improper.
For their largest clients, Charlie’s expertise has impacted potentially tens of billions of dollars of profit — along with where and how it will be taxed.
So how did the 60 millionaires do it? And can I do the same?
There are several ways. On average, the millionaires earned $3.5 million each and “managing your tax affairs” is an allowable tax deduction — it reduces the amount of income you are taxed on.
I earned way less than $3.5 million last year, so presumably this makes it easier.
“Some people earning a million dollars or more paid, on average, $80,000 each to manage their tax affairs, which reduced their taxable income below the tax-free threshold,” Australia Institute senior economist Matt Grudnoff told my colleagues Nassim Khadem and Michael Janda.
But the “paying the accountant” deduction will only get me so far.
For the 60 millionaires, it’s a long way from an average $3.5 million income to below the tax-free threshold of $18,200.
Another possible deduction is legal costs linked to managing your tax affairs, such as suing the Australian Tax Office or defending a claim.
Of the 60, the average amount claimed for legal costs was $250,000, reducing taxable income a little closer to the magic zero.
There’s other tax deductions related to interest ($14.3 million) and dividends ($16.9 million) that also edge taxable income down.
Many of these deductions are available to ordinary punters, without the need to sue the ATO.
I could do that, too, but probably not after seeing this 4 Corners: Ordinary people taking on the ATO is not recommended.
Give it away
The biggest single deduction the millionaires made, on average, were donations: $114.4 million in total, or around $1.9 million each, on average.
So, more than half of the reduction in their taxable income was giving to tax-deductible causes, such as charities or political parties. In other words, money they did not keep.
I donate money to charities I support, but if I gave away all of my income, that would severely reduce my ability to feed our children.
All together, the deductions add up to $165.3 million worth of different ways to reduce tax bills — still not quite enough to lower around $210 million of collective income down to nothing.
And, while I can use some of them, most are not appropriate for my situation.
Or yours, I’m guessing.
Charlie suggests there could be other reasons for the result.
Some could be above the age of 65 years, an age group that gets generous tax concessions.
In retirement, earnings on a fund up to a $1.7 million balance ($3.4 million for couples) are tax free.
They could also own a profitable small business that is structured in a way that it pays company tax but makes fully franked dividends to shareholders. (Even more effective if the shareholder is over 65 years old.)
And, with the way some concessions to capital gains tax work, some or all of the capital gains made by small businesses could be reduced or disregarded if you satisfy certain conditions.
There could also be people who operated a loss-making business in their own name.
A further category could be people getting up-front depreciation on a very expensive asset — such as a $1 million machine — because some COVID-19 economic measures gave people the ability to “write down” things they had just bought.
ZiffCo goes global
That’s all very nice, but I’m not over 65 years old, don’t want to give my accountant $80,000 and I’m not keen to sue the ATO.
I’ve got a better idea.
Australia’s income tax rates are between 19 and 45 per cent. The company tax rate is 30 per cent. (But they’re just 25 per cent if you are a “base rate” company with less than $50 million in turnover.)
However, in Singapore, income tax rates are between 2 and 24 per cent and the company tax rate is 17 per cent.
See you at the Merlion: Singapore here I come!
If I’m an Australian resident or live here 183 days a year, essentially the ATO says I’ve got to pay tax here.
However, if I set up a Singaporean branch of an Australian company, that’s where things get interesting.
Say I create ZiffCo and sell my services to the ABC, who pay the branch in Singapore for work I’m doing in Australia. Then it gets down to whether the “branch income” is subject to the general anti-avoidance rules (or GAAR).
“The general anti-avoidance rules will only apply if the dominant purpose of your arrangement is to obtain a tax benefit,” the ATO states.
GAAR, they’re on to me.
MAALing the tax system
Things are different since 2016, when it would have been easier for me to move things around.
That was when the government introduced the Multinational Anti-Avoidance Law (MAAL).
It was commonly known as the “Google Tax” because it was designed to deal with tax minimisation moves by multinationals such as Google and Microsoft.
Previously, I could have provided a service in Australia with a small office and minimal overheads, and charged for that service through an entirely different office in a low-tax country such as Ireland.
The changes mean I now must put a reasonable amount of money — which will be taxed in Australia — through the local office.
Essentially, after Charlie used my notepad to chart a complex series of boxes, arrows, squiggles, arrows returning to the original box and decreasing profit figures the answer is clear: You can do some offshoring to minimise tax, but it’s not easy.
And, unless you’re dealing with at least tens, if not hundreds, of millions of dollars, it’s not going to be worth having the fight, because the downside, time and expense will outweigh the possible gain.
The lawyers, consultants and international experts you’ll need aren’t cheap. And the tide is turning against the practices globally.
The ATO isn’t sitting around wondering how fewer than 120,000 people inhabit Kiribati yet apparently hold $682m in Australian banks, or how Amazon Australia paid $20 million tax on more than $1 billion in revenue or how McDonalds and Uber pay their taxes.
It’s doing something about it.
Tax offices around the world have been getting wise to the shifting and diminution of the tax base they’ve seen from multinational tax avoidance and “treaty shopping”, where people try to get the benefits of a tax treaty between two countries without living in either.
People, and companies, just need to get used to paying tax.
However, I remain open to being paid a million dollars a year and seeing if I can make it work.