Taxation: Why the attack on family trusts?by Ian SpryNews Weekly
, November 4, 2000
As Dr Ian Spry QC explains, family trusts are not the tax avoidance vehicles that some would have us believe. Yet, mooted changes to the tax laws would, if enacted, have a devastating effect on tens of thousands of small businesses, particularly family farms.
There has been much recent disenchantment with Peter Costello's alleged "tax reform". A plethora of advertisements showing chains being removed from taxpayers concealed the fact that chains are really being put on instead. The GST has proved complex and oppressive, and has increased enormously the overheads on small businesses.
Last month, the Howard Government released, at Costello's instance, an exposure draft of further legislation directed against trusts. This legislation will strike small businesses even harder than other recent purported "reforms".Equal treatment
Costello has claimed that the purpose is to create "equal treatment" for all business entities. But this claim is clearly false: partnerships are not touched, and many types of trust are excluded. The actual targets are family trusts, of the kind used by small business for convenience and protection.
The current tax position of family trusts as defined in the Income Tax Assessment Act is simple. The income is taxed at 48.5% if it is not distributed. If it is distributed, this must be to a close family member, who of course pays tax on it as on any other income. There hence cannot be any tax avoidance.
The convenience of this position is that with a trustee company, beneficiaries are generally protected against personal liability to creditors, and cannot be bankrupted if a business fails. Further, assets can be passed easily from generation to generation, and income can be distributed to the family members who most need it.
What the Treasurer now proposes is that trusts should be taxed as companies, but with more onerous provisions imposed. The trustee would have to pay full company tax, and the trust would be subjected to extraordinarily complex legislation which would interfere drastically with its convenient and practical operation. The exposure draft material already amounts to 357 pages, and if the proposal went ahead it would end up much longer.
The principal tax consultant for the Institute of Chartered Accountants, Mr Kevin Traill, has described the proposal as "draconian", and the Institute comments that "non-fixed trusts, which are often used by small businesses, have been unfairly targeted by the government".
There are many concerns at the Costello proposal. Loans by trustees to beneficiaries would be subjected to harsh new rules whereby they may be treated as taxable distributions. Various distributions of capital would be taxed as income.
Also, it is threatened that the use by beneficiaries of trust assets would be taxable. Further, compliance requirements would involve sending in forms and payments to the tax office and the need for larger fees paid to accountants and taxation advisers.
The new Costello proposals support the view that his alleged "tax reform" is in fact fraudulent. Far from simplicity and equity, it involves unjustifiably harsh new regimes that are designed to generate more money for Government spending.
Our maximum tax rate of 48.5% remains one of the very highest amongst comparable countries. But instead of reducing it and aiming generally at simplicity, Costello has been introducing thousands of pages of tax legislation, all of which is intended to create further burdens, that is, to raise more revenue. Bracket creep
Even the vaunted "tax cuts" much referred to by him were bogus, because they did no more than return "bracket-creep" caused by recent years of inflation. (Bracket-creep occurs when inflation forces wages and salaries into higher tax brackets, where higher rates apply and taxation is imperceptibly increased.)
National Party and Liberal Party ministers and back-benchers have, regrettably, been supine on these matters. Clearly they have no understanding of this legislation or its effects.
Unfortunately, they field questions by repeating disinformation put out by the Treasurer and his advisers. Broadly, he has given the Australian Tax Office a blank cheque, and taxpayers have been afforded no protection.
What is particularly disturbing is that much of Costello's advice comes from left-wing ideological sources.
Legislation which would not have been countenanced by Paul Keating has proved more ideologically acceptable to Costello.
The reality is that Australia is being subjected to one of the most onerous and restrictive tax systems in the world. This message must be understood by members of parliament, and also by the community generally.
Much of what Costello has done already will be difficult to reverse, but it is necessary to stop short his further "initiatives" and look behind the "tax reform" propaganda until a balanced assessment can be made of what has been taking place.