It’s not just Malcolm Turnbull. Your super smells like the Caymans, too

October 16, 2015

16 October 2015

By Tim Lyons

Labor gave Australian politics a mild Caribbean flavour this week by accusing Malcolm Turnbull of using an entity based in the Cayman Islands tax haven for some of his very considerable investments.

The Caymans only real claim to fame is as a place where tax liabilities go away. Corporations (including all the worlds biggest) and individuals (including the super-rich) use tax havens. Some arrangements can be diabolically complicated but the essential principle behind tax havens is pretty simple.

Profits or earnings that would be taxable in one country are moved to the tax haven and, like magic, you are clear of some or all tax obligations you’d otherwise have in the place the money originated – or where it goes next. But there’s no physical operation in these havens, it’s a effectively just a post-box. The whole thing is a fiction and very often a rort.

Labor senator Sam Dastyari, who has done really important work highlighting corporate tax avoidance and appalling behaviour by financial planners, led the charge against Turnbull. But on this occasion the senator didn’t quite go the distance.

Turnbull’s investment was via a managed fund – ie an investor gives money to a fund manager, which uses a Caymans entity in its structure. This probably insulates the prime minister from too much criticism.

Had he and Lucy established their own tax haven entity the charges would have much more strength. In fact, it would be a sound basis to call for a resignation. On Thursday Turnbull bridled at the implication that he had investments in the Cayman as way to avoid Australian tax, saying:


[B]ig funds, big companies, small funds invest in these offshore vehicles and when they do, the income comes back to Australia and all of the tax – not most of it, all of it – goes to the Australian taxation office.

In one sense the prime minister deserves a bit of a verballing, given he’s persisting with plans to repeal Labor initiatives to reduce tax secrecy by Australia’s wealthiest. The public are entitled to be suspicious of a very wealthy man leading a government currently trying to help the wealthy hide their tax affairs.

The government continues to rely on an utterly spurious argument about “kidnap risk“ to try and block transparency on executive remuneration and, during the GFC, the release of the value of bankers’ bonuses. Either that, or we are just too stupid to understand the information, so it should remain private.

Dastyari is right to attack the use of tax havens. They exist for no other purpose than preventing money reaching national treasuries. But the simple truth is that your superannuation balance smells faintly tropical too. Some of your money has been to the Caymans, or an equivalent.

Super funds invest by giving “mandates” to managers to invest in different assets. It is common for both Australian and international managers to use subsidiaries in tax havens as they invest money around the world and return it home. The super fund you are in, and the one I’m in, and the one for which I am a trustee director: all use managers which do this. It’s essentially not possible to find ones that don’t.

Of course your complicity – and personal gain – if you have $50,000 in super managed by other people is different to someone directly managing their fortune of in the millions or billions.

The prime minister and his wife Lucy are very, very wealthy indeed, with a net worth around $200m. They have a complicated portfolio of investments, some obscure and complicated enough that they would baffle more than a few people who work in financial services – think “twice-geared hedge fund” or “high yield corporate bond ETF”.

This is the point: the wealthier you are, the more elaborate the schemes you end up involved in and the more they are worth to you. Many rich individuals do end up creating entities of their own in tax havens and engaging in other arrangements to magically reduce their taxable income.

This year’s tax statistics revealed that 55 wealthy Australian’s earning an average of $2.3m each paid no tax at all, even the Medicare levy, after deductions. You don’t get rid of a million in tax with your receipts from Officeworks and the donation to Vinnies.

This same group did manage to spend an average of $1m each on tax-deductible advice from lawyers and accountants to get all of this done.

The sheer pervasiveness of aggressive tax schemes is one factor in the ethical blind spot that exists about tax. It’s probably the only area of regulation where it’s acceptable to say “we will do the absolute minimum we have to”.

You can’t imagine a CEO saying (openly) that they would dump as much waste as they could before being fined, or that they try and collude with competitors as much as they could up to the point the ACCC would be interested. Yet on tax, that attitude is not just common, it’s almost universal.

While there is some hope that the tide of opinion on tax and equity might be changing, the story of Malcolm and the Caymans underlines how far we have to go.

In the meantime every bit of this game means someone else pays more tax, or we run bigger deficits, or we cut public services or investments. Or all three. Almost all of us have at least a very small stake in tax havens. Most of us have a much, much bigger stake in cracking down on them.