Why Australia's flood levy seems inappropriate

Australia has recently been faced with natural disasters of extreme proportions - the flood and cyclone Yasi in Queensland and other states, followed by the Perth bushfires.

Julia Gillard in response to the disasters proposed a flood levy and since then the bill has been tabled. What strikes me as odd is the timing of the flood levy. At the the time when the news on the Queensland floods was unfolding, the Australian Prime Minister made the announcement on the flood levy. It was almost as if, Gillard went to Queensland to assess the structural damage and forgot entirely about the danger to lives and at that critical moment, made a calculation of the cost of repair and spent that time worrying about rebuilding cost. Instead of focusing on rescue efforts. That level of detachment of central government is shocking.

While the country is making a big profit, the super profits tax which was introduced was called off.

Now, when there is a disaster and the extent of the disaster cannot really be measured, it seems odd to impose a flood levy. It is almost as if, the government is looking at the reaction of the general public expressing their concerns over the disaster and decided to bank in on the emotions. A flood levy is very different from calling for a donation from the public. Gillard does not seem to know the difference. Anna Bligh, the Queensland Premier made an appeal for donations. In contrast, Julia Gillard as Prime Minister called for a flood levy.

In developing a fiscal policy, governments should track where the profits are. In Australia, that clearly must be the resources industry where the wealth is. a super profits tax on the resources industry would have been more appropriate because that's where the money is.

Governments should never take advantage of people's emotions. To see the charity in people's hearts and to take that opportunity to impose tax on the emotion must clearly be wrong. Never mistake a tax from a donation. Taxes have this regressive character of cutting across all sectors of the public eventhough those receiving aid is exempted. That kind of exemption is not capable of removing all the regressive character of the tax. Businesses or people who's lives are inadvertently and indirectly affected by the disasters cannot be properly exempted. The sad result is that poorer people end up paying out a bigger percentage of their disposal income for a tax such as this flood levy. This, against a backdrop of rising cost of living, again inadvertently caused by wealth of resources in Australia, must be a double jeopardy for the taxpayers in Australia. I almost cannot recognize what the Labor party typically stands for in Australia.

My concern at the end of the day is that, if Australia, with its sophisticated first world government machinery in place can make such a fiscal disaster, where would a country like Malaysia stand in tackling resource allocation for coping with disasters.

theoretical pricing

Malaysia adopted the OECD transfer pricing rules in the year 2003 by issuing formal guidelines. For those who are not required to be familiar with the intricacies of tax laws, these guidelines require taxpayers who have inter-company transactions to prepare transfer pricing documentation.

With the insurgence of global trade, a lot of multi-nationals are subjected to these rules. And also local homegrown companies.

The transfer pricing rules require companies to adopt an arms-length price. This is based purely on economic theory that when parties transact, the real price is the market price or the arms-length price. This theory is as difficult to implement as that of the efficient market hypothesis in the securities industry.

As much as it is nice to make assumptions, so that a nice formula can be developed, it is quite a different thing, to subject businesses to spending loads of money to conform to that mathematical formula. The business world is dynamic and moves in real time. It does not always work in a formulaic manner.

Much as the tax authorities globally would like to have a certain and nicely justified arms-length price in order to compute the tax, the tax authorities ought to recognise that ultimately the price is computed based on assumptions. And in many instances, that price eventually arrived at, if at all possible, is not reflective of the company's transacted price nor does it resemble any other price in the real market place. Why expend so much resources to arrive at a fictional figure?

When rules such as this is implemented, the tax authorities ought to invest resources by using the field audits not as audits, but as a field visit to understand how businesses in each of the industries are common in its basic features.

With that understanding, the functions, assets and risks analysis can be better developed. And the tax authorities ought to be sharing its database with the companies to see how best the functions, assets and risk analysis apply to each of these companies. The businesses can explain their best case and what is most workable.

Whilst there is no understanding between the businesses and the tax authorities, it cannot be possible to place an obligation on the taxpayer to comply with an abstract set of rules such as the transfer pricing rules.

Hence it is wrong for the tax authorities to ask taxpayers during its first field audit if they have any transfer pricing documentation and to threaten a big penalty on taxpayers if they do not have the transfer pricing documentation, or to reject such documentation because the comparables are not acceptable by the tax authorities. Such penalties could run as high as 60%.

taxpayer recognition

Paying taxes is about giving up property to provide for the public. It is an ultimate act of kindness. Whilst the laws and the rules surrounding tax obligation are getting more complex, the administration of tax has become more aggressive. How does that leave the taxpayer feeling?

The education system has generally improved. Little kids are taught to learn through play. There is no longer a need to use the cane. Children are learning just as well if not better.

Will payment of tax ever move on to the next level. Will taxpayers be rewarded to filing their tax returns correctly and paying taxes on time? Hey, how about a free umbrella or even a free diary for the small taxpayer. Will the tax authorities consider holding a concert on tax collection day with a free take-away meal? Should not the top 1000 taxpayers be given a recognition for being a top contributor to the social fund, for giving money to the government to run the country.