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CGTSo the foreign private equiteers and those who make money servicing them are off to Canberra, seeking some dumb, pliable politician to save them from the nasty tax man. Poor diddums.

The really interesting thing though would be if the Australian Tax Office was to extend some of its thinking about the foreign private equity rort to residential real estate. To be consistent, maybe real estate investors shouldn’t be entitled to the 50 per cent tax discount they currently receive on capital gains. For real estate investors, “capital gains” are simply income, just as TPG’s Myer lick’n’flick “capital gains” profit was really just income that the ATO is trying to tax accordingly.

In taking on the foreign private equity tax avoiders, the ATO is having to work around and under poor 2006 legislation that the was the result of the Federal Government of the day listening to finance industry lobbyists and falling for the old furphy about making Australia a regional finance hub. Compared with challenging Australia’s landlord class, it’s easy.

As usual with any change in our mountainous tax legislation, opening or closing a door tends to breed a raft of loopholes and cat flaps that will inevitably be exploited by the smart money. The Dutton/Costello 2006 legislation wiped out capital gains tax for foreigners investing in anything here other than real estate – the sort of change likely to spring open a series of Roll-A-Doors rather than mere windows of opportunity.

Yes, it was dumb. Among other things, it immediately gave foreign private equiteers an immense advantage over domestic investors. And if anyone has seen any evidence that it sparked a boom in Australian regional financial hubbery, please tell me. Another part of the lobbyists’ story was that we had to give foreigners tax free capital gains or they wouldn’t invest here. The government apparently fell for that line too.

In the TPG episode and now with a broader ruling, the ATO is trying to fix that mistake on a case-by-case basis. It’s limited to examples such as TPG’s Myer bonanza where the equiteer channels the profit through tax havens to also minimise tax in whatever jurisdiction it calls home, but the interesting part is that the tax man is looking at whether the typical private equiteer’s buying and selling of assets is their normal business, and thus the profit becomes “income” rather than “capital gains”.

There’s nothing new about that sort of distinction – as any share trader or real estate speculator should know. To get the 50 per cent capital gain discount, it is necessary to hold the asset for 12 months. (Hold a share for 51 weeks, you’re a trader; hold it for 53 weeks, you’re an investor and pay half the tax. Of course its arbitrary nonsense, but that’s our tax system that the major parties aren’t game to tackle.)

The ATO’s move on TPG could be a precedent to get beyond such random rules. The residential real estate investment industry is built upon the expectation of income from capital gains – with relatively rare exceptions, rent doesn’t cover the cost of money, which is where the blowout in negative gearing comes in.

Just as TPG’s standard operation is to buy an asset and sell it a bit later for more, many real estate investors would be hard pressed to convince the ATO their motive is otherwise. Unlike share investors who expect/hope their companies will grow and become more profitable and therefore worth more, the standard investment unit tends not to grow much at all.

It’s just a thought, the idea of more consistent treatment of income, but it will never catch on. The next logical step would be the equally-arbitrary 12-month rule for avoiding capital gains tax on the principle residence – and why should the principle residence be exempt at all?

Michael Pascoe is a BusinessDay contributing editor, source www.smh.com.au

Tags: economy, money, property, real estate, tax

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