Treasurer Peter Costello must absolutely love BHP-Billiton chairman and former Liberal Party banker Don Argus. That’s because the Don’s refusal to offer WMC shareholders a scrip alternative to BHP-Billiton’s $9.2 billion cash bid for WMC Resources will provide the federal government with a capital gains tax windfall running into hundreds of millions of dollars.

The Howard government has introduced some significant reforms on capital gains tax, although they inherited from the Keating government one of the most punitive CGT regimes in the world, as Malcolm Turnbull helpfully pointed out on Inside Businesslast Sunday:

Well, capital is taxed at a lower rate and indeed at a nil rate pretty well everywhere in the world. That’s to say, I cannot think of any competitive countries where capital is taxed at the same rate as current income. So I think to be competitive, you cannot afford to treat capital identically to income although the arguments for having everything taxed at the same rate, there’s obviously an argument then but it makes you very uncompetitive.

The two key reforms introduced by the Howard government were rollover relief for scrip takeovers and a halving the CGT rate for assets held longer than 12 months.

Given that WMC Resources shares have almost doubled in six months and BHPB is conducting the biggest cash takeover in Australian corporate history, we are also talking about the largest CGT liability ever generated by a single sale.

BHPB could have allowed WMC shareholders to at least defer this by offering a scrip alternative, but they refused repeated requests from the WMC board on the grounds that equity capital was more expensive than debt and they didn’t want the BHPB share price become to become hostage to hedge funds.

Crikey knows someone who spent $10,000 buying 2,000 WMC shares at $5 each last September. That investor, like many others, already has a large capital gains tax bill for 2004-05 because the market continues to hit records highs every other day. The BHPB offer will generate a capital gain of $7,700 for this investor, however the sale will occur inside 12 months so he’ll be paying his marginal rate of 30%. That’s a tidy $2,310 windfall to Canberra.

This situation will be repeated in varying degrees for all WMC shareholders. Assuming the collective gain is $4 billion and the average rate is only 15%, that still constitutes a whopping $600 million windfall for Canberra.

If BHPB had offered a scrip alternative, the vast majority of shareholders would have opted to defer the tax liability. Surely this must make Don Argus an ever bigger legend in Liberal Party circles. Not only has he done the national champion thing and out-bid the dodgy Swiss outfit Xstrata, he’s also forced WMC shareholders to hand over a large slice of their profits to a very happy federal treasurer.