Taxing Responsibilities

A Blunder Down Under

The Australian economy just can't catch a break these days! First, Australian Stock Exchange (ASX) CEO E. Kupper finally agrees to implement "strenuous suggestions" to resign. Then, the Australian Tax Office (ATO) gets into trouble when word spreads about how accomplished various multinationals have become at gaming the tax system of the country. The situation is heart-breaking, considering that Australia is still reeling from the huge losses incurred by the mining sector during the last few quarters.

The Australian media is awash with everything from breaking news to opinion pieces about the tax fiasco, which is about to escalate from a purely Australian tax fraud investigation, to a crisis that would make The Great Depression look like a drunken stumble. This situation is another reminder that tax law is more complex than it looks, because it (perhaps more than any other field) is highly susceptible to potential conflict of interest (COI) issues.

The Definition Of Conflict Of Interest (COI)

A conflict of interest can occur where commitment to the protection of the primary interest (i.e. the principal goals of the profession or activity) is compromised by excessive concern for the secondary interest (i.e. any & all forms of personal advancement or gain).

COIs are generally viewed as legal missteps that occur very rarely. But, since COIs are not necessarily the product of bad faith or corruption, they are actually more common than most people realize. As an illustration of how even an organization that has a reputation to remain strictly above reproach can unconsciously stray, take the case of the Defense Housing Authority (DHA) of Pakistan.

The Case

The DHA was initially created as a welfare program to provide low-cost real estate to deserving personnel of the Armed Forces & their families. While the legal decision-making power lies firmly with the head of the Army General Headquarters (GHQ), i.e. the Chief of the Army Staff or COAS, informally speaking, the DHA consists of 3 separate "branches": DHA Karachi, DHA Lahore & DHA Islamabad.

While the initial intention still officially stands, rumor has it that the DHA mission statement is becoming increasingly commerce-oriented, to the point that its welfare-related aims are beginning to appear somewhat unimportant since around 2000. That creeping change began galloping when Gen. [r] Ashfaq P. Kayani's enterprising younger brother Capt. [r] Kamran Kayani brought Elysium Holdings into the DHA with the promise of a windfall for the widows & orphans (among others) - & wound up (allegedly) pulling a Ponzi Scheme on them instead.

Fortunately, he & his alleged accomplices were only able to bankrupt DHA Islamabad & DHA Lahore. DHA Karachi is reportedly safe. But for how long? The GHQ is displaying as much composure as can be expected from servicemen, but a poker face isn't going to alleviate the suffering of the affectees of a scam carried out under DHA (&, by extension, GHQ) auspices.

Authority Issues: Corporate HQ Versus Regional Office

The DHA Karachi business model is based almost entirely on the approach of coastal land reclamation: drain the seawater & build on what is basically the seabed. The idea of extending the city into the sea has its risks, but they are outweighed by the Pakistani construction sector's casual disregard for safety code violations...which means that a skyscraper is far more dangerous than the seabed.

Plots of land in DHA Karachi began to be distributed decades ago. Phases 1 through 7 are already in varying stages of commercial & residential use, & are said to be worth a fortune, considering that Karachi is the financial center of Pakistan. Phases 8 & beyond are still being dried out & are consequently completely valueless to the owners for the foreseeable future.

So, why is Phase 8 & beyond being classified under the heading of taxable assets? What is being taxed - the privilege of paying the price of the land & putting one's name on the title deed? Even though, the owner cannot construct, cultivate, rent or live on the land he or she owns - can't benefit or profit from it in any way?

The Pakistani Finance Ministry has made it clear that it has its hands full, convincing national & international stakeholders that its policies do not look like a multinational corporation's Christmas wish list; consequently, it has no time to alter Pakistan's regressive taxation system. But isn't it a little harsh - even by regressive taxation standards - to start heavily taxing a welfare scheme meant for the brave personnel of the Armed Forces & their relatives, years & years before the real estate is worth a nickel to the owner(s)?

While the exact facts can only be explained by an expert in Contract Law, rumor has it that DHA Karachi may have been indirectly instructed to "provide assistance" to its bankrupt counterparts in Lahore & Islamabad, by taxing the Karachi deed-holders (even of currently unusable real estate) more highly to raise a fund for Capt. [r] K. Kayani's alleged victims. If so, that constitutes a COI for DHA Karachi (protection of its own clientèle versus contribution to compensation/ damages/ settlement payments to the Lahore & Islamabad DHA affectees). If so, the GHQ must stop this misguided benevolence before it turns into a class action lawsuit.

The Internationally-Accepted Definition Of Taxable Assets

In order to further clarify what taxable assets cover, here is a brief explanation of the term by Investopedia (www.investopedia.com):

Most types of income are taxable by the Internal Revenue Service (IRS). In fact, all income is taxable unless it is specifically mentioned in the Internal Revenue Code as not taxable. Some examples of taxable income include gains from stock accounts, real estate capital gains after a sale, gains from the sale of common stock & bonds, income from employment, certain fringe benefits, interest gained from bank accounts & tips. Some tax credits & refunds are also taxable, as are under-the-table transactions & bartering. Inheritances, child support, welfare, manufacturer rebates & adoption expense reimbursements are generally not taxed. Gains in tax-deferred accounts are protected from taxation under specific conditions, but may be taxed later or if those special conditions are violated with an early withdrawal or illegal usage. Taxpayers often apply asset allocation strategies to reduce their total tax liability, including the use of tax-deferment accounts. These are legal methods, & may be used alongside deductions & credits.

To reduce taxable income & thereby achieve a lower tax liability, begin by applying all allowed deductions to calculate the adjusted gross income (AGI). Gross income includes all earned & unearned income, but AGI should be significantly lower on most personal returns. Choosing to itemize deductions or opt for the standard deduction will impact total liability, so it is worthwhile to compare tax liability under both options before filing. AGI is the income the IRS applies taxes to, so lowering this number with allowed deductions will result in a lower overall tax liability. Tax credits can further reduce your liability or even result in a refund for the taxpayer.