September 28, 2016
Mark Minchin

The Nobility of Paying Taxes

I could be on shaky ground from the outset with an article with a title like this. After all, Minchin Moore is an advice business whose clients rely on us to ensure they don’t pay too much tax. And that’s precisely what we do, we optimally structure their affairs for tax efficiency, while remaining well within the envelope of the rules.

However sometimes investors are overly focussed tax, so much so that they overlook other equally important but competing priorities. Most often it is the investment decision that is overlooked, in favour of tax minimisation. For instance an investor may wish to retain a long held stock because they’re emotionally attached to it as a consequence of its success and the difficult reality that to sell or reduce could be costly from a capital gains perspective. Whilst this is invariably true, often the idiosyncratic (stock specific) risk arising from being so heavily overweight one company is a more important consideration. After all, some tax can be a small price to pay for the increased security provided by diversification. Companies come and go, but in the longer term it is the diversified market itself that prevails.

In Australia our tendency to myopically focus on tax stems largely from the counsel we have taken from our accountants. After all, these professionals are paid to focus on tax, and may be less inclined to focus on our investment ‘big picture’.

An overly intense focus on tax can become particularly problematic when it is embraced at a national level. Case in point Greece, and its national sport of ‘tax avoidance’.

In Greek culture it is entirely acceptable to do all within one’s power to avoid tax – even if it means hiding assets and existing entirely within the cash economy. But this path can lead to an unsavoury end.

In Greece the unassailable cultural challenge of tax collection coupled with a socialist attitude to government services has seen government debt expand to 180% of GDP (it is commonly accepted that anything over 100% is destructive and unsustainable).

Cultural attitudes are hard to change, but I would argue that having a sensible attitude to taxation is essential for long term economic prosperity of households and nations alike. Indeed, having a simultaneously cavalier approach to paying tax and a socialist attitude to services is a ridiculous contradiction.

In the current financial year the Australian Government plans to spend a total of $390bn (excluding what they give to the states). Of this, around $159bn will be spent on social security while $105bn will be spent on health and education. That’s 77% of your taxes that will be spent on social security, health and education. That is, aged pensions, veterans pensions, assistance to the disabled, caring for our sick, assisting our mothers through childbirth, and the schooling of our children. All causes which seem overwhelmingly good and which are part of the fabric that makes Australia great.

Meanwhile we see evidence of some wealthy Australians aggressively donating to charity in the pursuit of tax deductions. These people often seek greater control over how their funds are applied, so prefer philanthropy to paying taxes.

Philanthropy is a wonderful thing, but occasionally people neglect to see that the funding of our nation, the caring for our disabled and schooling our children is also a worthwhile cause.
The attitude of wealthier Australians toward tax is not helped by the permeating culture of envy. That is, our tendency to cut down the high income earners in society, or assume that they can and should pay more every time the government experiences a budgetary squeeze.

According to Peter Costello the 2% of Australians who earn incomes above $180,000 pay 26% of the nation’s income tax. Meanwhile, the bottom 45% of income earners pay less than 4%. This reality prompted the former Treasurer to remark: “The only problem with high income earners is that there isn’t enough of them!”

No doubt we need more skilled workers, entrepreneurs, and inventors. People who will one day draw high incomes and pay high taxes.

The taxes paid by middle and upper Australia carry the country, and we should all be proud of them. Moreover, they should be proud of themselves and the noble contribution they have made.

I think of some of my clients and can imagine literal highways being funded by the taxes they have paid during their careers. For the most part, these people have taken risks and started ventures that provided jobs and incomes to many others. One of these clients recently commented to me that upon making an administrative enquiry with the tax office, the attendant developed an attitude of disdain once the client had quoted his tax file number. This is a sickness that helps to perpetuate the corrosive circle. If we aren’t respected for contributing, then why would we?

If you want to barrack for the Wallabies or cheer for our Olympic swimmers, then pay your taxes and be proud of your contribution to our great nation!

Speculator or Investor?

Most of the people who come to us for advice consider themselves investors, not speculators. The difference is of course open to interpretation and worth exploring. The dictionary defines speculation as “the forming of a theory or conjecture without firm evidence”. Sound familiar? This is indeed how many investors commonly [Read More]

October 06, 2016