Prime Minister Malcolm Turnbull is copping criticism for investing family money in the Cayman Islands, a well-known Caribbean tax haven. Money investigates the truth behind the political mud-slinging and the relevance for your family's finances.
Claim
Subscribe now for unlimited access.
or signup to continue reading
Labor senator Sam Dastyari told Parliament on Wednesday that investing in the Cayman Islands was "not fair" and "not right".
"There is one reason people invest in the Cayman Islands – so they don't have to play by the same rules as the rest of us. This isn't fair. And it's not right.
"How is it appropriate that the Prime Minister of this country thinks it is acceptable to have his investments sitting in the Cayman Islands?"
Senator Dastyari acknowledged the investments were "all legal and disclosed" but asked, "Is any of it appropriate?"
Counterclaim
In reply, Turnbull said he paid full tax on his investment income in Australia.
"The income of the fund is taxed in the hands of the investors in their own home jurisdictions. So the fact is that all of my or Lucy's income from investments including funds which are registered in the Cayman Islands is taxed in full in Australia," he said.
Turnbull said he deliberately chose offshore investments so that he would not have any conflicts of interest in Australia. For example, many Australian funds invest in Telstra, which would have been a potential conflict when he was communications minister.
Turnbull pointed out that many ordinary superannuation funds invest in the Cayman Islands.
The facts
First, is the Cayman Islands a tax haven?
Yes and no. It is true that the Cayman Islands does not impose any direct tax on residents or companies based there. As a result many companies choose to register in the Caymans, despite not operating there.
US President Barack Obama has described one popular company registration address as "the biggest tax scam on record".
However, there are also legitimate reasons for funds to be based there. The tax haven status of the Cayman Islands is an effective way to ensure the income is not taxed twice.
This does not necessarily mean that the investors in those funds are dodging tax.
Eight out of 10 hedge funds are domiciled in the Cayman Islands because then they can invest in the US without going through the convoluted US tax filing procedure for thousands of investments a year. The Cayman Islands location just makes the paperwork easier.
Ironically, it actually means they pay slightly more tax when the money is repatriated than if they chose Delaware in the US, another popular location for company registration.
So an Australian investor in a Cayman-based hedge fund would pay 100 per cent of their tax in Australia, whereas if they invested in a Delaware-based fund they would pay withholding tax in the US and the remainder in Australia.
As long as Turnbull is declaring his full investment income to the Australian Taxation Office in the correct manner – and there is no evidence he is not – then his defence is sound.
It might be an "odd look", as Jason Ward, who wrote last year's landmark report into Australian corporate tax avoidance for the Tax Justice Network, describes it. However, as Ward acknowledges, there is no reason to suspect that Turnbull has not paid all the tax due on his investment returns.
And yes, Labor MPs may well have some of their super in the Cayman Islands.
Your family's finances
Can you follow Turnbull's strategy and invest in a hedge fund in the Cayman Islands?
Probably not. Hedge funds are usually available only to those with a large amount to invest. The Turnbulls are worth about $200 million.
Are you already invested through your super?
Probably to a small degree.
Many ordinary, respectable super funds invest in managed funds where the underlying investments operate in tax havens. Large funds like AustralianSuper invest in some companies that are incorporated in the Caymans.
However, super funds will commit only a very small proportion of their members' savings to hedge funds because it can be a risky strategy.
Hedge funds invest in exotic investment strategies, such as investing in shares in the expectation that their prices will go down, not up.
A hedge fund manager will have some type of investment strategy that will produce good returns almost regardless of what investment markets are doing. At least, that's the promise.
Investment is often made through a single managed fund which, in turn, can invest in dozens of hedge fund managers, most of which are micro-businesses operating in tax havens such as the Cayman Islands.
The tax benefits are not the only reason the Cayman Islands are attractive to hedge funds. Operating outside of regulation means they do not have to provide much disclosure to investors.
Hedge funds are mostly unregulated, though the managed funds through which super funds invest, tend to be regulated.
Many hedge funds have blown up over the years and others have been subject to fraud. The most spectacular example of the latter was that of Bernard Madoff. He ran a Ponzi scheme – where the money from new investors to his New York-based hedge fund was paid to existing investors as returns.
Additional reporting by David Potts.
