Is property the most "tax aggressive" sector?

A new report on tax evasion in Australia has singled out the property industry as the most “tax aggressive” sector, responsible for more than $1.5 billion in annual tax foregone. However, the Property Council of Australia says the report fails to understand how property trusts work.

The report, Who Pays for our Common Wealth?: Tax Practices of the ASX200, has been released by the Tax Justice Network in conjunction with the United Voice union to highlight the tax practices of Australia’s corporate sector, which has led to a reduction in tax paid from the current statutory tax rate of 30 per cent to an effective tax rate of 23 per cent, causing an estimated $8.4 billion in annual tax revenue lost.

“The most tax aggressive is the real estate sector, which has an overall average effective tax rate of just five per cent,” the report states.

“Low effective tax rates are common across all 17 real estate companies registered in the ASX 200, ranging between 0 per cent and 15 per cent. The average effective tax rate for the entire sector is five per cent; however the median effective tax rate paid by the individual companies is as low as one per cent.”

The real estate sector accounted for 18 per cent of foregone tax revenue, while comprising just four per cent of the ASX 200, the report said.

The reason for this, it said, was due to the prevalent use of real estate investment trusts.

“The principle behind the tax-free nature of REITs is that income is supposed to be taxed once it is distributed to investors, however capital gains tax discounts and other measures currently limit the amount of tax that is collected on this income at the shareholder level. In some instances – particularly if investors themselves use personal trusts to claim their dividends – no tax will be collected on this revenue at all.”

The report said many real estate companies also made use of “stapled securities” – a corporate structure almost unique to Australia.

“Stapled securities have significant advantages for a company interested in minimising its tax obligations, since it allows a company to shift profit into trust structures while maintaining debt within the taxed proportion of the company. Most countries have disallowed the stapling of securities because of the tax arbitrage implications of this arrangement.”

The use of trusts and stapled securities in the real estate sector has led to the 17 real estate companies listed in the ASX 200 paying on average $283 million in tax, while generating profits of more than $6 billion.

Source: Who Pays for our Common Wealth?: Tax Practices of the ASX200

Property Council slams report

The Property Council of Australia strongly defended the sector, saying reports of the real estate industry not contributing its fair share of tax were “completely untrue”, and showed a failure to understand how property trusts worked.

“The property industry is actually the nation’s single largest tax payer, contributing $34 billion in real estate specific taxes in 2013,” PCA chief executive Ken Morrison said. “That’s before you count the corporate tax and GST the industry pays.

“The tax is being paid; it is being paid by the end unit holders.”

Mr Morrison said the property companies named managed properties on behalf of end owners of units in the trust, which he said were often superannuation or pension funds or mum and dad investors.

Managed investment trusts, he said, were created to ensure small investors had the same opportunities to invest in property as high net worth individuals and corporations.

“The MIT regime levels the playing field for all investors, and helps ordinary Australians prepare for retirement,” he said.

“It is the end owner – the unit holder – who pays tax on the income from the properties, with the level of tax they pay based on their own applicable tax rate.

“This ensures that the investor who benefits from the investment is the one taxed on the investment.

“It is not a tax dodge.”

Mr Morrison also said the stapled securities structure helped Australia maintain its competitive edge and remain strong in market downturns.

“Australia’s property trust regime is admired around the world as one of the most advanced and equitable systems.”

Westfield taken to task

The report used Westfield to illustrate tax avoidance strategies.

Westfield alone, with its effective tax rate of eight per cent, has led to average annual tax foregone of over $370 million, the report stated, the fifth largest figure in the ASX 200.

“As the largest and most profitable of Australia’s real estate companies, Westfield unsurprisingly contributes the greatest share in lost tax revenue within the sector, with an annual average tax loss of $541 million arising from the tax minimisation practices of both the Group and the Trust combined. This represents 34 per cent of the total tax minimisation activities of the real estate sector annually.”

A previous report, it said, found that Westfield “had the greatest capacity to be tax aggressive based on a number of variables including the use of secrecy jurisdiction subsidiaries”.

It has 32 subsidiaries in “Secrecy Jurisdictions”, the report said, which “undermine the ability of democratically elected governments to levy taxes in a consistent way and provide loopholes for the wealthiest to escape paying their fair share of tax”.

In a previous report by the Uniting Church, Westfield ranked fourth among ASX 100 companies utilising secrecy jurisdictions, based on its 2010 annual report, which listed more than 700 subsidiaries and controlled entities registered in nine different jurisdictions. Westfield’s 2013 report, however, listed just 21.

“This does not reflect a disbursement of these subsidiaries by Westfield; rather, the company has simply revised what they consider to be ‘material’ to shareholders. The net result is that the company’s operations are much less transparent,” the report stated.

The report recommends the government:

  • require large corporations to provide more public disclosure and transparency
  • increase fines for tax evasion and extend laws to effectively cover the full range of corporate tax avoidance strategies
  • eliminate or restrict the use of stapled securities for tax arbitrage, according to global norms
  • ensure that the Australian Tax Office is adequately funded and staffed
  • lead the G20 to adopt tough and effective global rules to combat corporate tax dodging