Finance Finance News Labor turns up the heat on family trusts

Labor turns up the heat on family trusts

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Shadow treasurer Chris Bowen: focused on fixing the 'Swiss cheese' tax system. Photo: AAP
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Shadow treasurer Chris Bowen ramped up his rhetoric on tax avoidance on Monday, telling a Melbourne audience that the time had come to plug the holes in Australia’s ‘Swiss cheese’ tax system.

As well as reiterating Labor’s determination to curb excessive use of negative gearing and capital gains tax concessions, Mr Bowen honed in on the “unfair” use of family trusts for tax avoidance.

In a speech to the Per Capita think tank, Mr Bowen said that closing tax loopholes was essential to get the budget back to surplus, adding that “under current assumptions, the government will never get there”.

Following the speech, Mr Bowen told The New Daily that splitting income with family members in low tax brackets should have been stamped out years ago.

“Last time anyone did anything about family trusts was John Howard as treasurer in 1981 as part of his anti-tax-avoidance measures,” he said.

“But he didn’t go the whole way. He only dealt with distributions to minors, and the big hole in the system was that you could distribute to others in your family on low tax thresholds to minimise tax – that’s just fundamentally unfair.

“You can’t do it if you’re a PAYG taxpayer – you can only do it if you have the right tax vehicles set up.”

Taxing times

Use of discretionary trusts has been increasingly popular in recent years, according to Sydney University tax law professor Michael Dirkis.

He says companies as small as “a corner deli” ask their accountants to set up family trusts, with the largest tax savings resulting from splitting income with spouses, or adult children who are studying rather than doing paid work.

At present, family members receiving money via a trust pay tax at their marginal income tax rate.

Labor’s policy would change this to tax trust distributions at 30 cents in the dollar – the same as the non-discounted company tax rate.

Labor estimates that would return around $1 billion a year to the budget bottom line, and would affect around 2 per cent of taxpayers.

While Labor is targeting tax avoidance through trusts, their other key functions – protecting family assets from litigation, or to help smooth income flows across financial years – would be undiminished, according to Professor Dirkis.

Farmers, who use trusts for all those reasons, would be exempt from Labor’s higher taxing policy – though as Professor Dirkis points out, the definition of who is a farmer, or which part of a complicated business is ‘farming activity’ would create difficult grey areas.

Long time coming

Any tax change that rakes in $1 billion in revenue per year is always going to be controversial, but Mr Bowen says he is not expecting to see a full-scale campaign against the changes in the run-up to the next election.

“When we announced the policy the government tried a scare campaign on it and it failed – you don’t hear about it in the political debate,” Mr Bowen said.

“We’ve announced a policy that every Liberal treasurer has wanted to do since 1981 but have been too scared to do. We know Peter Costello wanted to do it. We know Joe Hockey wanted to do it, but they couldn’t get it past their party.”

By the time of the next election, he says, “they won’t really be able to say ‘you know that policy that was released 12 months ago which we haven’t said anything about, it’s really going to wreck the economy’. You can’t do that in politics”.

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