John Menadue. Why Cayman Islands?

Nov 19, 2015

I must confess I was surprised to learn that Malcolm Turnbull uses a hedge fund domiciled in the Cayman Islands. The story has come and gone without much examination.

Conflicts of interest

In the SMH of 24/25 October 2015, the veteran journalist Alan Ramsey highlighted what Malcolm Turnbull told the parliament about his hedge fund in the Cayman Islands. Malcolm Turnbull had said

In order to avoid conflicts of interest [in Australia] almost all of my and my wife’s investments – and they’re all disclosed – are in overseas managed funds, which means that I and Lucy have no say in which individual companies those funds invest it.” 

Alan Ramsey went on to comment

Nothing Turnbull said in his defence … tells us why it is not possible for any minister, state or federal, any premier, or any prime minister, to make personal or family investments in Australian projects, companies or developments of any kind for fear of breaching conflict of interest issues. Yet surely, you’d think, this would not be beyond the wit of lawyers and financial advisers, even parliamentarians to overcome.”

Deferring tax

In this blog on 12 November “Vexed issues of ethics”, Professor John Taylor, Head of School of Taxation in Business Law in the Australian School of Business at UNSW, examines the legal and ethical questions of investing in hedge funds in tax havens. He says

In the case of an investment via a tax transparent US hedge fund, the capital gain will be subject to Australian tax as soon as the investments are sold. But in the case of the investment via the Cayman Islands hedge fund, the capital gain would only be taxed in Australia when the fund makes a distribution. The time value on the money will mean the real cost of the tax the investor pays on the capital gain falls as long as the fund defers distribution to the investor. Over time in real terms, less Australian tax will be paid. Admittedly the investor will not have benefited from receiving the distribution in that time and will not have control of the time of distribution. But an investor can use the appreciation in value of the investment as security against other financial transactions. … So deferring Australian tax through the use of foreign hedge funds is currently not caught under Australian law. … 

“If everyone did this, there would be seriously adverse revenue consequences for Australia. But of course, not everyone can. Investing in Cayman Islands hedge funds is largely the preserve of the financially astute or those with the resources to seek advice from the financially astute.” 

There is still a great deal unexplained about this Cayman Islands episode. Just imagine the media blitz that we would have seen if Kevin Rudd, Julia Gillard or Bill Shorten used a hedge fund domiciled in the Cayman Islands.

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