Opposition leader Bill Shorten has announced plans to tax distributions from family trusts at 30% as Labor targets wealthy people using trusts to cut their tax bill.
The ALP believes the change, which would target the country’s top 2%, could raise $4.1 billion to FY21-22 $17.2 billion over 10 years.
Shorten argues Australia has “a two-class tax system” and Labor’s targetting of discretionary trust distributions to people over 18 follows on from reforms by former treasurer (and later PM) John Howard in the early 1980s.
Discretionary trusts are used to redistribute income from sources other than PAYG work, with the ability to split the money among people in lower tax brackets to reduce tax liabilities. While they are common amongst wealthy families they are also used by small family businesses to house assets and reduce tax exposure.
“When some Australians don’t have the option to opt out of the tax system and choose their tax rate, but the fortunate few do, we think that this needs to be tackled,” Shorten said
“While artificial income splitting is completely legal, that doesn’t mean it is fair.
“Ordinary PAYG workers do not have the option of artificially splitting their income among different family members to lower their tax bill.”
Shorten said the average amount held in private trusts by the wealthiest 20% of households is $123,000, while for the next wealthiest quintile it’s $4,000.
Farm trusts, charity trusts, testamentary and deceased estate trusts and disability trusts are exempted from the policy.
“We’re not abolishing trusts. This is about trusts serving their true purpose, so that distributions are taxed fairly,” Shorten said.
“Individuals and businesses will still be able to use discretionary trusts. However, the new minimum 30% tax rate on distributions will make sure discretionary trusts cannot be used as a vehicle for aggressive tax minimisation.”
Labor says there are 642,000 discretionary trusts in Australia and its changes will target around half of those, 315,000.
The government portrayed the move as a tax on small business, with finance minister Mathias Cormann saying small business owners use trusts and the move will damage the economy.
“Bill Shorten is going to try and create this impression that he can take $17 billion out of the economy but no-one’s going to have to pay,” he said.
Shadow treasurer Chris Bowen rejected the suggestion, saying very few small businesses use discretionary trusts.
“I mean there are many, many hundreds of thousands who are small businesses in Australia and most don’t use discretionary trusts,” he said.
While Labor’s proposed tax rate is the same as the current company tax rate, Bowen said it was different to an earlier Greens policy to tax trusts as companies, saying the ALP rejected the idea.
“It doesn’t work primarily because if you tax trusts as companies then you provide dividend imputation and there’s obviously, you don’t really get the improvement in the Budget bottom line. The improvement in the Budget bottom line comes only then from foreigners who have trusts in Australia,” he said.
Chartered Accountants Australia and New Zealand head of tax Michael Croker, said his organisation was prepared to work with Labor, saying Sunday’s announcement was light on details.
“There are already a number of emerging questions about Labor’s model”, he said, including the equity of treating active small businesses differently from farmers and the potential for over-taxation, particularly for business trusts.