How and Why the Super-Rich Just LOVE the Income Tax!

“Tax the rich!”: Politicians’ favorite election pitch.
The super-rich will be laughing up their sleeves.

Why?

In one word: loopholes.

All laws and regulations have loopholes you can drive a truck through—if you have enough money.

All laws and regulations have loopholes you can drive a truck through—if you have enough money.

And if that loophole is not immediately apparent, all you need to do is hire an enterprising lawyer and/or accountant to find it or create it.

Needless-to-say, to afford that “truck” you need to be rich. And the richer you are, the more “trucks” you can afford.

But the beautiful thing about a loophole is it’s perfectly legal (when properly established).

So, who can take advantage of a loophole in the law?

We all can.

But the loopholes available to the poor and middle class are penny-ante stuff compared to the “trucks” the super-rich can afford.

Legal Loopholes You Can Drive a 747 Through

If you have managed to reduce the amount of tax you have to pay on millions of dollars of income to an insignificant number, you’d be crazy to crow about it from the rooftops. So—understandably enough—examples of the super-rich’s tax minimization schemes are hard to find.

One well-documented example will suffice: Kerry Packer. Australia’s richest man when he died in 2005 was worth A$6.5 billion (US$4.94 billion).

Packer owned the Sydney-based Consolidated Press group. A newspaper and magazine publisher started by his grandfather, Robert Clyde Packer, in 1919, which his father, Sir Frank Packer, expanded into television and casinos. “Father and son each engaged in a series of complicated schemes . . . to keep their dues to a minimum.”^[1]

Kerry Packer took advantage of every legal loophole he (or, rather, his accountants, lawyers, and other tax advisors) could find. With the result that—

In the financial year 1991–92 Kerry Packer’s Consolidated Press group earned a profit of A$623 million before tax and had a positive cash flow of almost A$2 billion. The group’s provision for income tax was a mere $5 million, less than 1 percent of profits. Its actual tax payment made during the year was an almost identical $6 million. [Emphasis added.]^[2]

And in “the six years from 1987 to 1992 . . . the Packer empire earned $1.445 billion in profits and paid $91 million in tax”—or 7%.^[3]

To put this in perspective, at the time most Australian companies paid 30% to 39% of their profits in tax, company profits of $1.445 billion would normally attract a tax of $433.5 million or more.

Packer had managed to reduce his company’s tax bill by an incredible $342.5 million!

And he didn’t neglect his personal tax. On his dividend income of $35 million to $50 million a year, “Kerry Packer pays remarkably little tax. He appears indeed to pay a lower rate of tax than his gardener, or should one say gardeners.”^[4]

In 1991, a parliamentary inquiry asked Packer whether his tax arrangements were contrary to the spirit of the law. He replied:

“I am not evading tax in any way, shape, or form. Of course, I am minimising my tax. Anybody in this country who does not minimise his tax wants his head read.”^[5]

Kerry Packer was telling the truth: he was minimizing his taxes, not evading tax.

How he achieved these results legally is a fascinating story. One which we non-billionaires can only dream about.

The reason that we can know so much about his scheme is because, unsurprisingly, Packer’s “low” tax bill inevitably attracted the attention of the Australian Tax Office (ATO). For example,

[One] feature of [Packer’s] scheme that fascinated the taxman was that the interest due to [a] Hong Kong trust was paid into a bank account in Sydney and re-lent interest-free (at the direction of the trustee) to one of Packer’s private companies in Australia, so that Packer continued to have use of the money. No funds were actually remitted to Hong Kong.^[6]

Another Australian taxpayer had established a similar scheme. The Australian Tax Office disallowed his tax deductions, whereupon the Federal Tax Commissioner was taken to court—and lost.

Another part of Packer’s “anti-tax” structure was a chain of companies and trusts around the world.

Another part of Packer’s “anti-tax” structure was a chain of companies and trusts around the world.

Between 1984 and 1990 [a] small [London] shopfront played home to a number of Consolidated Press’s offshore companies, making it in effect Packer’s international headquarters. In the last of the 1980s these UK companies earned some $370 million in tax-free profits at a time when the Packer empire employed only a handful of people in the United Kingdom doing business. While the various companies were nominally based in the UK, they were in fact run from Hong Kong. As a result, they were not required to pay UK tax. Yet, for reasons that the ordinary person might find hard to grasp, they also paid no tax at all in Hong Kong because they did not actually do business there either.^[7]

Packer was taking advantage of UK “offshore companies”: though incorporated in the United Kingdom, no tax was due if all their business was offshore. While in Hong Kong only domestic-source income was taxable. With the additional advantage that there was no Hong Kong tax on interest, dividends, or capital gains.

As you can imagine, such structures incur considerable expenses. Not just the costs of the necessary tax-haven companies, trusts, and their directors and administrators, but also the employment of an unknown number of lawyers, creative accountants, and tax advisors. Probably running into millions of dollars a year.

Plus, additional costs in protecting such structures from attack from tax authorities; and changes that are made as tax departments everywhere attempt to close existing loopholes which inevitably entail that the Packers and their ilk must search for new ones.

And when the taxman attacks, there are the costs of defense.

In 1984, to relate one instance, the Australian Tax Office won a court battle, and, so, gaining access to the accounts of Packer-related trusts and companies thought to be involved in offshore tax-minimization schemes.

In 1987, the ATO and Packer went to “war” again—in the United States.

The ATO sought and gained cooperation from the IRS which then attempted to access details of accounts held by Packer-related companies in various American banks.

Unsurprisingly, Packer’s lawyers challenged the IRS in the American courts—and won.

I hate to think how much Packer had to pay those lawyers. To cite just one example, many years ago I was involved in a legal dispute in the United States, and at the recommendation of a friend, hired his New York lawyers. Who charged $5,000 a month just to answer the phone!

At those kinds of rates, which are not uncommon, Kerry Packer was probably spending several million dollars a year on lawyers and accountants.

Gargantuan expenses—but money well spent.

And money that is . . . (you guessed it??) . . . tax deductible!

Packer’s complex and expensive tax-minimization schemes certainly paid off in spades, cutting his tax bills by up to $200 million a year!

We can confidently conclude that some $2 billion, give or take, of the increase in his net worth from $100 million in 1974 to $6.5 billion at the time of his death in 2005 can be attributed to his creative use of the entirely legal tax loopholes available only to the super-rich.

We can be certain that Kerry Packer is far from alone. Just think of the “dynasties of wealth” which persist for several generations. Like the Kennedys and the Rockefellers in the United States—though while still rich, they’ve dropped off the list of the richest families:

 

	Family	Company	Country	Founded	Wealth US$bn*	Age§
1	Walton	Walmart	USA	1945	$215.00	76
2	Mars	Mars	USA	1911	$120.00	110
3	Koch	Koch Industries	USA	1940	$109.70	81
4	Al Saud	Saudi Aramco	Saudi Arabia	1932/33	$95.00	88
5	Ambani	Reliance Industries	India	1957	$81.30	64
6	Hermes	Hermes	France	1837	$63.90	184
7	Wertheimer	Chanel	France	1910	$54.40	111
8	Johnson	Fidelity Investments	USA	1946	$46.30	75
9	Boehringer, Von Baumbach	Boehringer Ingelheim	Germany	1885	$45.70	136
10	Albrecht	Aldi	Germany	1913	$41.00	108
11	Thomson	Thomson Reuters	Canada	1930	$40.60	91
12	Hoeffman, Oeri	Roche	Switzerland	1896	$38.80	125
13	Mulliez	Auchan	France	1961	$38.40	60
14	Cargill, Macmillan	Cargill	USA	1865	$38.10	156
15	Johnson (SC)	SC Johnson	USA	1882	$37.30	139
16	Van Damme, De Spoelberch, De Mevius	Anheuser-Busch InBev	Belgium	1400s	$36.80	471
17	Quandt	BMW	Germany	1916	$34.70	105
18	Cox	Cox Enterprises	USA	1898	$33.10	123
19	Rausing	Tetra Laval	UK	1950s	$32.90	66
20	Newhouse	Advance Publications	USA	1922	$31.00	99
21	Chearavanont	Charoen Pokphand Group	Thailand	1921	$30.70	100
22	Ferrero	Ferrero	Italy	1946	$30.50	75
23	Kwok	Sun Hung Kai Properties	Hong Kong	1972	$30.40	49
24	Pritzker	Hyatt Hotels	USA	1957	$29.60	64
25	Lee	Samsung	Korea	1969	$29.00	52
	* $ billion in 2020. § Years since founded.			AVERAGE:		112
	Source: Bloomberg: The World’s Richest Families 2020

 

While we can’t know the fine print, we can reasonably assume that all these families could say—to paraphrase Kerry Packer—“Of course, we are minimising our taxes.” Even if they are not going to Packer’s extreme lengths.

And, that the taxes they have not paid have contributed to their current wealth.

Taxes have an additional benefit: they protect the rich and super-rich by making it much harder for the poor and middle class to accumulate enough wealth that could topple them from their positions on the Forbes 500 rich list.

 

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^[1] Paul Barry, The Rise and Rise of Kerry Packer (Sydney: Bantam, 1993), page 378.

^[2] ibid, page 382.

^[3] ibid

^[4] ibid, pp 377-378.

^[5] ibid, page 382.

^[6] ibid, page 381.

^[7] ibid, pp 383-4.