Hot Topics

Billionaire Kerry Packer’s stark explanation of tax minimisation echoes through time

Go to John Beveridge author's page
By John Beveridge - 
Billionaire Kerry Packer tax minimisation investment Australia

It was the blunt but ingenious billionaire Kerry Packer who memorably explained to a stunned Parliamentary committee exactly how the tax system works.

The late business tycoon said: “I am not evading tax in any way, shape or form. Now of course I am minimising my tax and if anybody in this country doesn’t minimise 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.”

It was a classic summary of how things really work on the ground that is just as accurate today as it was 33 years ago and will probably remain accurate for many decades to come.

It is a particularly poignant quote as we approach the start of the amended stage three tax scales which famously now see a lower-than-expected tax cut for high income workers and see the top tax rate of 45% now cut in at $190,000 a year.

These higher-than-expected tax bills for higher income earners have understandably led to a very busy time for those accountants and others who deal with wealthy clients who, just like Kerry Packer did, are always trying to minimise their tax.

Investment companies and super the hot new options

It is instructive to see what they are doing with the two main avenues being used to reduce tax bills being the use of investment companies and superannuation.

Of course, existing tax reduction strategies including the familiar negative gearing and using the capital gains tax discount for asset sales after a year are also being ramped up.

Super is an obvious choice because it provides the ability to store away money that can be invested in a variety of assets with the rare ability to produce a tax-free income in retirement.

There are restrictions on super, mainly on the amount that can be paid into it which are limited by contribution caps, but the highly concessional tax treatment is hard to match.

Using super to claw back lost tax cuts

Modelling by Westpac showed that higher income earners could claw back much of their lost tax cut through making increased superannuation contributions.

That analysis showed Labor’s stage three tax changes would make super more tax concessional for workers earning $135,000 to $200,000 by 7 to 15 percentage points compared with the original package.

However, there is a catch to super apart from the fact that it is preserved until most people turn 60, and that is the announced but so far unlegislated plan to add an extra 15% earnings tax on all super nest eggs above $3 million.

The introduction of the “soft cap” of $3 million has led to a situation in which the first $1.9 million in superannuation (the effective pension cap) upon retirement is highly tax effective, and the balance between $1.9 million and $3 million is very tax effective.

However, balances above $3 million may become much less tax effective should the government’s planned policy which is set to begin on 1 July, 2025, be passed.

Investment companies have some advantages over family trusts

That has led to the popularity of investment companies, which for a variety of reasons are now being preferred compared to the more traditional family trust.

That is particularly the case now because investment companies pay tax at 30% while all people earning over $135,000 will now stay in the 37% (plus Medicare levy) marginal tax bracket for their personal taxable income between $135,000 and $190,000.

That creates an obvious way to use an investment company to tax-effectively manage a family’s investment activities.

Some of the other advantages of using an investment company are for protecting assets and for estate planning flexibility.

Companies are perpetual, so they live on when the key people die, with the ownership of assets including shares and property transferred according to the deceased shareholder’s wishes and the ability to replace directors with other relatives.

Companies also offer a flexible structure, with the ability to issue different types of shares and rights while lending money to a company to invest is simple, along with the reinvestment of future profits.

That is a superior option compared to superannuation, with accounts wound up on death and a virtual “death benefit” tax of 15% is payable on the taxable component of any payment made to non-dependant beneficiaries.

There are important reasons why an investment company is being preferred over a family trust.

Companies must pay tax on their income each year but don’t have to distribute income or pay a dividend to shareholders.

A family trust doesn’t pay tax directly but it does have to distribute its taxable income to beneficiaries who then pay the tax at their marginal tax rate, which can be as high as 47%.

There are also strict rules on trusts that do not let beneficiaries of a distribution simply pay it back to benefit someone else – stopping the practice of “washing” income through the hands of beneficiaries with a lower tax rate, often the children of the trust operators.

That problem doesn’t apply to an investment company, which can declare a dividend to a shareholder, including a family member on a relatively low marginal tax rate, with the shareholder loaning the funds back interest-free to the company.

That means that effectively the cash doesn’t need to leave the company, plus there is flexibility about whether a dividend is paid at all.

Family trusts can keep going after the death of key people but they are not usually perpetual and are often restricted to a duration of 80 years.

Capital gains tax concession lost

Perhaps the biggest downside for investment companies is that they can’t make use of the capital gains tax concession, which reduces the amount payable by half for assets held for more than a year.

Family trust beneficiaries can use that capital gains concession, although investment companies have the benefit of facing a tax rate of 30%, which can be much lower than that faced by shareholders and can also frank dividends to reduce taxable income.

It is a complex area but one that many wealthy families and individuals are carefully examining due to the looming change in the tax scales.

An obvious strategy for the government to avoid the prospect for such tax minimisation would be to harmonise the top tax rate with the company tax rate but there doesn’t seem to be much prospect of that, particularly when Australia’s corporate tax rate of 30% is already seen as uncompetitive with many other countries.