Two of the funds in which Prime Minister Malcolm Turnbull has some of his million-dollar investments are incorporated in the Cayman Islands. They have their registered offices [ie, addresses] in Ugland House, George Town, Grand Cayman. This is a building with almost 19,000 other registered businesses and funds. As US President Barack Obama said in 2008, that must be one big building. Or one big scam.
Every tax avoider says the real reason they invest in these tax haven countries is for the good return, not the lack of tax. My guess is that the headquartering of the hedge funds in the Cayman Islands means that in fact it is other countries' tax that is avoided and this increases Turnbull's already high return.
Turnbull has argued that avoiding conflicts of interest as Communications Minister is the reason for investing overseas. However many of the communications companies Turnbull had dealings with over the past two years had offices in the Cayman Islands, possibly even the same building as Turnbull's investment fund finds. Telstra certainly has a subsidiary in the Cayman Islands plus a range of other tax havens. If Turnbull's conflict of interest argument is valid, does that mean every other minister who has investments in Australia has potential conflicts of interest? This justification looks pretty weak, Malcolm.
There are two main reasons for investing in a hedge fund in the Cayman Islands. The first real reason is the low tax or no tax rate on income earned in or often through that jurisdiction.
Associated with this is the fact that overseas income earned in other jurisdictions can perhaps also be routed to places like the Cayman Islands tax free. Double Irish Dutch sandwiches come to mind. This means the capital fund in the Caymans may grow unhindered by tax anywhere in the world unlike, for example, investments in Australia.
Of course, the income on this capital may be taxed to Australian residents depending on the nature of the income and the type of vehicle through which it is earned. I don't have the information available to me to make an analysis about the tax arrangements Turnbull is involved in. Least of all can we judge the validity of his statement that he complies with all Australian tax laws and pays the appropriate amount of Australian income tax on the Cayman Islands' investments.
That may very well be true; the real question is what level of Australian tax the Prime Minister is paying on that income and what he would have paid if the investments had been undertaken in Australia. Is it an effective tax rate of zero, or 5 per cent, or 10 per cent or 20 per cent? The arrangement might be legal but is it just?
Which leads me to the second reason for investing in tax havens. Secrecy laws in these countries have in the past blocked the attempts of the Australian Taxation Office and other tax authorities from getting any information about investments by Australians in those havens.
However, under threat of sanctions from the OECD against tax havens that did not sign on to greater transparency, various tax havens have entered into tax information exchange agreements to provide tax information in limited circumstances. For example, in 2010, Australia negotiated a tax information exchange agreement with the Cayman Islands.
However, just because the Prime Minister's investments in the Cayman Islands are all over the news, and he has claimed he has been abiding by Australia's tax laws, that does not on its own give rise to the reasonably foreseeable grounds for the ATO to ask for information about his Cayman Island investments. The ATO would have to already know a taxpayer was shonky before it could ask for information to show the taxpayer was shonky.
Of course, the ATO could ask for (or could already have asked for) that information but we wouldn't know about it because of the secrecy laws in our own income tax laws. Tax officers can be jailed for disclosing information about a taxpayer.
The Prime Minister is not any ordinary taxpayer. In the interests of justice and equity, he should make all the information about his Cayman Islands arrangements public so that Australians can judge whether he is avoiding any Australian tax or taking advantage of special rules that reduce or exempt his income from Australian tax.
John Passant is a former assistant commissioner in charge of international tax reform in the Australian Tax Office.