Is it still viable to set up an off shore investment company or have most of the advantages largely disappeared through inter-government transparency?

Welcome to Finance and Fury, the Saw What Wednesday edition, where every week we answer questions from each of you.

This week’s question is from Adam  “Hi Louis - Really enjoy your podcasts.  Not sure if this is too outside of your comfort zone but I would be really interested in hearing a podcast on whether it is still viable to set up an off shore investment company.  as we move into a period where the government is taking on more and more debt I've started looking into offshore options on the internet. I know the Turnball's etc have offshore companies to manage investments, but has most of the advantages largely disappeared through inter-government transparency?”

Investing Offshore – look at how it is done, if it still can be with increased transparency – and the pros and cons

Why would you want to invest overseas – create an offshore investment? Reduce tax and reduce transparency – but these things aren’t so easy as they were 20 or 30 years ago In Australia – and most western countries – we have high levels of tax – especially the more you earn – consumption, state taxes – taxes on investments – Investment Income taxes or CGT – have the 50% discount – on CGT which some other nations don’t have – But Also have Franking Credits to help offset dividend income Even Super as a tax structure is an effective tool to reduce tax payable – but does have legislation risks -but TBH – so does every investment vehicle that we have – even investing overseas can be at the whim of a DTA – laws change The OECD though have a massive reach when it comes to monitoring offshore tax havens - they now control the tax systems of most countries in the world through policy directives - investing offshore less attractive due to OECD – “aligns the information exchange provisions to the current OECD standard by replacing Article 19 of the existing Agreement. The new Article 19 continues to provide for the exchange of tax information by the tax administrations of the two countries” OECD say their purpose is to “eliminate unfair tax competition” – to make countries have the same sort of tax rates – reducing the incentive of investing off shore – but also increase information sharing to avoid people hiding taxable incomes At the corporate level – companies like Google, EBay, Starbucks and Facebook have shown they can do tax minimisation very effectively – tax conduit and tax sink country strategies - structures involving Ireland (only 12% corporate tax rate), and Netherlands (tax-free for holding intellectual property) – covered this a while back in the series in the EU including the City of London corporation – so the big companies have worked out the game – but at the individual level – can we do this? This is the difference between tax minimisation – and tax avoidance – What you do have to be within the law – which is very hard to achieve with the increased regulations – not only in Australia with the AML/CTF rules – Austrac – ATO – along with OECD intergovernmental cooperation – Many of the ultra wealthy and massive companies do this – how they remain competitive – if you have to pay 30% tax versus 1% tax like in Apples case – you can easily out compete – but they did get caught and had to pay some tax back But as Kerry Packer once said when questioned about his tax strategies - “I am not evading tax in any way, shape or form. Now of course I am minimizing my tax and if anybody in this country doesn't minimize their tax they want their heads read, because as a government I can tell you you're not spending it that well that we should be donating extra.” But we are not companies – Companies have protection – and now if directors of a company do something illegal they are liable – unlike a multi-billion dollar company – we don’t have the budgets to pay for lawyers for millions of dollars a year to 1) work out a tax strategy for us or 2) defend us against the state if we get taken to court – which has an unlimited budget due to tax funds – Example of this in action is Project Wickenby – The Project Wickenby was cross-agency taskforce – spearheaded the Australian Government's fight against offshore tax evasion - taskforce was established in 2006 to expand upon Australia's financial and regulatory systems through preventing people from participating in using jurisdictions that weren’t forthcoming on information about individuals investments or tax payments – stereotype on Switzerland task force led to over $2.2 billion in tax liabilities being raised. It also increased tax collections from improved compliance behaviour following high profile investigations, prosecutions and sentencings – essentially scared people into ceasing investing overseas or not declaring all of the income - celebrities like Paul Hogan were caught in this Project Wickenby finished on 30 June 2015 when the Serious Financial Crime Taskforce was established. One scheme that got shut down was being used by HWI – with a tax planning scheme of using companies in Vanuatu to shift money through – How did this work? A Vanuatu “management” company was set up and agreements were made between this company and an Australian company whereby management, royalty or IP fees were charged – then tax deductions were being claimed to offset income in Australia – again what Apple and many other companies do – but if no management or IP is being provided – and fees being charged are high – it is illegal – especially as the money that should have been paid was being treated as a loan

The days of using dodgy tax planning schemes to avoid paying tax are well and truly over

The question is – what is the point of doing it at the individual level? – but also how do you do it and how much will it cost to achieve Not a legal expert in this subject – but experts who deal in these matters aren’t cheap – might cost you $20-30k in legal fees each year to maintain – so the tax savings better be worth it The fact is – we are limited as an Australian investor from using tax minimisation strategies (legally) through overseas structures – you can still do it though in some manners – not advice – speak to a tax lawyer There are still many ways you can sometimes minimise your tax by investing offshore – Method – In order to invest in an offshore jurisdiction - you need to open an offshore investment account This account would be a form of brokerage/trading account – but you would need to also opened an offshore bank account – all the normal documentation is required to ID you or a company that was opening it – again your information can be shared back to Aus with the ATO There is special emphasis on the offshore location because that is the major reason for opening an offshore investment account The location is a tax haven where capital gains earned on any investments made are tax-free - If you trade the markets and are still an Australian resident, you can set up a company in Switzerland, Singapore, Hong Kong, or Malta, and although you still have to pay tax in Australia, you don’t have to pay tax until you bring the money back into Australia Some of these countries require you to buy a property there as well – and some accounts have a minimum of $100k to into the millions you need to bring into the country to qualify – again – these strategies are mostly beneficial to the ultra-wealthy Other benefits come in the form of reducing investment income payable – from DTAs Using offshore companies in a range of jurisdictions with tax treaties with Australia, eg. Malta, USA, New Zealand, Ireland Take Malta as an example – have a DTA with them since 1984 – Dividend income is taxed at 15% - as a withholding tax – But – is this better than tax on dividends here? Depends on your MTR but also franking credits

MTR

Net Income

Net Tax

0.0%

1.428571

42.9%

21.0%

1.128571

12.9%

34.5%

0.935714

-6.4%

39.0%

0.871429

-12.9%

47.0%

0.757143

-24.3%

Examples – per $1 of dividend on a FF share – Not until you get above $180k in income do you start paying more in Aus off a FF share Also – Super – I know you cant access it until you are 60 – but after this time there is 0% of tax – in the interim – income tax is 15% - but if you get a FF dividend in a WRAP account – get $1.214 for every $1 with FC Being a non-resident of Australia – which is the opposite works as well - If you choose to become a perpetual traveller and establish a residency outside of your home country - becoming a non-resident – you can pay 0% tax here in FF dividends, but don’t get FCs, pay 10% in tax on interest income as well Need to meet one of the non-residence tests – generally out of the country for 6 months of the year and prove that you don’t intend to live here permanently again (domicile test)

In summary –

Strategies to reduce tax by investing overseas are going – and the costs and complexity to maintain a structure may be more than any tax savings – also – don’t want to do anything illegal – important to ask a professional in tax law about this to avoid any massive fines or jail time But remember there are strategies that work well in Aus to help reduce tax payable on investment income Family trusts if you have beneficiaries – using super – personally having franking credits on dividends – these can yield lower taxable income results compared to if you do so in a country overseas after costs associated with this Thanks for the question Adam

 

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