by News WeeklyNews Weekly
Canberra Observed: Family trusts - will government bite bullet?
, February 10, 2001
Federal Cabinet faces an excruciating dilemma over the next few weeks on the issue of how it should proceed with its controversial legislation to tax discretionary trusts - or in fact whether it should proceed at all. The new law, which had already been put off for 12 months, is due to come into effect on July 1 this year, even though it has not yet been brought before the Parliament.
Farmers in particular are vehemently opposed to the proposed legislation claiming it is a form of double taxation, and the greatest threat to traditional properties being kept in the same families.
The most politically pragmatic decision would be to drop the legislation altogether this term, but for several reasons it won't be easy.
Mr Costello and his junior minister, Joe Hockey, under advice from the Department of Treasury, have declared the taxation of trusts an "integrity issue" from which there can be no retreat. Both Treasury and the Australian Taxation Office have had trusts in their sights for many years and the new tax system has been their best opportunity to go in for the kill.
Both Prime Minister John Howard and his PM-in-waiting Treasurer are fully aware that a tax reform-weary nation will not take kindly to a further round of changes and the tax on trusts will be a direct hit against the Coalition heartland - farmers and small business people. And, in the context of an election year in which even the Government's most optimistic boosters concede is going to be difficult to secure a third term, the tax on trusts seems like an unnecessary handicap.
Yet a total backdown would leave the Government vulnerable to a campaign that it is prepared to belt the poor with the GST, but happy to let the wealthy enjoy their "trust tax havens".
However, backbench National Party MPs are furious about the proposals and the issue spilled over late last year when Stuart St Clair went public on the issue.
The National Party backbencher led a minor revolt against Mr Costello - doing what all good Country Party MPs used to do - by being a burr in the side of their Liberal colleagues. He was severely chastised for speaking out on the issue.
In short, the Government has enemies on all sides over the proposed legislation and very few friends.
Under the Ralph reforms, all income earned by discretionary trusts (where the trustee decides how the income of the trust is distributed) will be taxed at the company rate, rather than in the hands of individuals. Other integrity measures are being proposed to eliminate tax avoidance to ensure that all monies paid by a trust, including the repayment of non-commercial loans, will be subject to tax.
At the moment trusts are not taxed, but individuals receiving moneys from a trust are taxed at the marginal rate. However, Treasury and taxation officials claim thousands, perhaps tens of thousands, of wealthy individuals are having their earnings paid into a trust which are then distributed to family members on lower tax rates, thereby avoiding tax. This, they claim, is a form of unfair income-splitting not available to the ordinary taxpayer.
The number of individuals using trusts has indeed sky-rocketed by more than 40 per cent over the past five years to more than 450,000 people.
However, critics of the new tax say any serious tax avoider has far more sophisticated and profitable ways at their disposal to avoid tax than family trusts.
Farmers also claim the proposals will amount to a form of double taxation and fear it will lead to farms, which have been kept in the one family for generations, being broken up. At present, farmers using trusts only have to pay tax on assets which are sold, and trusts are used as a means of passing on farm assets from one generation to the next. They believe the effect of the proposed legislation will be to make farmers pay tax on the transfer of assets between generations.
The most important factor to remember is that the Government only agreed to a crackdown on trusts as part of a package of concessions to win the support of the Australian Democrats to pass its GST legislation. The crackdown on trusts was sold back in mid-1998 as a way of making the new tax system seem fairer to battling families about to be hit with a goods and services tax.
So unless their leader Meg Lees has fallen completely under John Howard's spell, the Democrats will be loathe to allow any concession when the legislation eventually reaches the Senate. Late last year, both Howard and Costello promised their twitchy backbench, as well as business and farm lobby groups, that every effort will be made to prevent any "unintended consequences" of the proposed legislation.
Labor will no doubt be trotting out its extensive list of Howard Government Ministers whose family wealth is tied up in trusts as evidence of its "softness" on taxing the wealthy.
The difficulty for the Government is that if it waters down the legislation too much, Labor and the Democrats will block the legislation in the Senate and the Democrats will squeal that Howard has welshed on their GST deal. After severely antagonising its own supporters and then missing out on the extra revenue with a quixotic effort to keep its promise, the result will be a nil gain for the Government.