Taxing time on Trust

Shadow Treasurer, Chris Bowen, outlines his plan to tax discretionary trusts

Introduction Taxing time on Trusts

Ross Greenwood: Of course, one of the big stories of the weekend and even going into today is Labour’s policy to tax discretionary trust at a rate of 30%. In other words, income coming out of those discretionary trust would be taxed at 30% as compared with the current situation where people are taxed at the marginal tax rate which could be lower. Now, the question is will it work? Because there are certain exemption that Labour is saying it will put in place. Say for example, testamentary trusts for those who are planning estates into the future. Also, farmers would be exempted from this as well. But small business, I note today, has blown out about this because they believe that a legitimate means for small business to be able to not only manage their own estate planning, but also the way in which they control and own their businesses. They believe that they are being discriminated against as compared within particular farmers who the Labour party said will exempt them. Anyway, let’s go now to the Shadow Treasurer Chris Bowen, who is on the line right now. Many thanks for your time, Chris.

Interview with Chris Bowen, Shadow Treasurer

Chris Bowen: Always a pleasure, Ross.

Ross Greenwood: I suspect as you have said over the weekend, 98% of Australians are not affected by this in any way, shape or form. They also see that a lot of people, presumed to be very wealthy people, get away with basically a tax free kick by the use of trusts. The question is whether in fact this is generally hitting wealthy Australians or whether there are many family owned businesses that could also be caught as a result of the potential changes you bring in.

Chris Bowen: It’s very much targeted at high wealth and high income gross to get the big benefit out of income splitting that need to be in that category. Family trust, discretionary trust, to give you an example, the average holding for the top 20% is 123,000. The next 20% is 4,000. A huge gap. This is very much something which is used by people of high income and high wealth. Now, let me make it clear though. Family trust, discretionary trust are used by others in a very legitimate way for things like asset protection, succession filing as you say, small businesses. All very legitimate uses. But to get to the tax advantages of people that tend to be on high incomes and, Ross, this is a reform as you know. It’s a long term commentary that has long been called for. Peter Costello wanted to do. Joe Hockey wanted to do. But they couldn’t get it through because it’s been very clear that this is not only unfair but it’s a huge strain on the budget.

What if families split their incomes?

Ross Greenwood: Okay. Just a couple of things here. Say for example, when families split their income to take advantage of say for example, the $18, 000 first tranche of income a person can own with his, no tax. This is the way our tax scales work and it’s goes up the chain. What would technically if you bring these changes in using trusts, what would be different? Because compared with say for example, a private company distributing its income to a family member and as a result they would as wages simply be able to use the same mechanism. Where would the difference be?

Chris Bowen: Well, the difference is in terms of a minimum rate of tax. We have got- happy to go through a couple of examples or you’ve got a family member who’s working in the business. They’re getting a salary, wage, no charge. No difference. To get to this whole business point, anybody who’s running a business taking a wage, contributing to business, absolutely no difference. Where you got income is being split between family members and often Ross as you’d understand it’s being split almost exactly the tax free threshold. 18,000 here, 18,000 there. No tax is paid on it. We would apply a 30% minimum tax rate. Now at the moment, as you know, there’s already a tax on distributions from trusts to minors, people under 18.

Ross Greenwood: Which is sensible because that comes in $416 once I get beyond that. They basically have to pay the top wag of tax in this country which is smart policy and it stops people from being able to distribute the kids. Which everybody says is a reasonable policy.

Chris Bowen: I’m glad you said it’s smart policy. Basically what we’re doing is extending it. That was brought in by John Howard in 1980 when he was treasurer. He looked to it and said, “No. You shouldn’t be distributing money to kids and getting it tax free. I’m going to tax you with the top marginal tax rate for distributions to people under 18”. We looked at then very carefully considered it. Well, it’s basically extend that model 6AA as the part of the act to people over 18. When you got income splitting going onto spouses, to people who are over 18 but not earning much income, university students can demand. Even parents, grandparents below the tax rate threshold, there is a very significant possibility of reducing the tax. What we’ll do instead we looked at the Howard model, but for over 18 we think the top marginal tax rate is too high. What we would do is put the minimum rate of tax at 30% on. Basically, distributions to people who are over 30 from trust now attract to 30% tax rate. Quite a simple, just an extension of the existing regime that John Howard put in place. But frankly, this is what he was trying at the time. But probably should have always been in that when you fix it for the children, you fix it for everybody.

What about the farmers versus Small Business?

Ross Greenwood: Okay. Now, the other one. Let’s go back to the question of farmers versus small business operators. Because the small business sector, as you’re aware we’ll speak with Peter Strong a little later, are basically saying why the farmers get the protection yet we don’t? As we know, as you’ve pointed out, trusts are used as means for families to be able to protect their own interests. Say for example, if a son or daughter marries and to prevent their in law from being able to try and get inside the family’s business, if say for example, that marriage were to file and on top of that also allows for estate planning purposes for the life of that operation. Let’s call it a farm or a business to go beyond the life of the single proprietor, shall we call it that? That’s the sensible way in which trusts are used properly and legitimately in this country.

Chris Bowen: That will all continue hopefully unchanged.

Ross Greenwood: But for small business as well?

Chris Bowen: Yes. Absolutely. No change for small business there whatsoever under our policy. We perfectly understand that agreement that for those purposes you’ve explained it very well. It’s legitimate. For small businesses there’s no change there. Now, understand some people are saying, “I should have put farmers in. Well, okay. Euro is going to give it to Chris.” when you do a policy that you haven’t gone far enough- gone too far you’re going to get that there. In relation to small business, I’m glad you’re speaking to Peter Strong. He said today, he acknowledges that not many small businesses will be impacted by this. A couple of points just on small business. Again, as I said before, if you’re working in a small business, taking a salary, taking a wage, earner, were you paying your wife a wage in the small business or your kids, no change. The actual operations of small business doesn’t change. If you’re distributing your income to people who aren’t involved in the small business, who aren’t working there, in short you might be affected. But that’s a matter for you to determine how you pay or distributing your income. Now, on the matter of small business, now of course there’s 3.2 million businesses in Australia. Now, we have calculated, the Department’s budget obviously calculated, the number of trusts that will actually pay more tax. There’s 642,000 discretionary trusts in Australia. The number that will actually pay more tax actually it’s 318,000. All those self-identify as small business or industry related is 200,000. 3.2 million businesses. 200,000 trusts. Now, all those 200,000 trusts say we’re with business or industry. A lot of those are doctors, lawyers, accountants, partners in firms where the trust–

Ross Greenwood: In other words they’re the ones you’re really trying to identify here because they are the ones who can wash the cash through family members if they choose to do so.

Chris Bowen: Well, that’s just a statement of fact, Ross, that they are the ones primarily affected. Primarily, if you got the sandwich shop or the chippy or the other small business, they may well have a trust and like you said, that may well be for a range of purposes that is completely unchanged. We respect that. No change in how that works.

Ross Greenwood: Okay. There’s an aspect of this also and that is whether your political party right now with changes to say for example, penalty rates, try to turn obviously the change is back from the fair work commission. Obviously, with this move, really whether there is almost a focus on small business, whether you think that is where you’re going to get the tax out off. That’s an impression that some are reporting to me at least anyway.

Chris Bowen: I think that’s what Peter Strong will tell you. I don’t speak for him. But this policy itself won’t affect many small businesses. But they’re concerned about other things and sort of that accumulated effect and I understand that. We do have some differences with Costello. They want to cut penalty rates, we don’t. That’s a difference. We disagree.

Ross Greenwood: You want to unwind the company tax rights for example, for small business.

Chris Bowen: Yes. Well, we haven’t made a new announcement about that yet. But to be honest we have a lot of policy, we’re doing it one by one. But they want all the company tax rates put through and we are considering opposition on those that have already been legislated. There’s some differences with Costello but as I said, the vast majority of small businesses out there doing the right thing, got trust for all the right reasons from this policy, absolutely nothing to worry about.

Ross Greenwood: All right. Chris Bowen, Shadow treasurer, we’ll talk again about this. Know that in the future. We appreciate your time in the meantime.

Chris Bowen: Always good. Cheers, Ross.

Summary of the discussion with Chris Bowen

Ross Greenwood: Chris Bowen, Shadow treasurer. You’ve heard the policy. You understand how it works. The question I ask you, is it fair? Okay. Again, you can come back and say to me, “Well, it’s actually Labour party trying to raise taxes overall. Or is it actually stopping a roar? Chris Bowen says, well, actually John Howard introduced this with kids way back. And it should have been extended even at that time. And is it fair?

Even if the topside 2% of taxpayers in this country that use these trusts, basically, ultimately stop it from distributing it to their family members. Is that fair? Now, I got to say, I always have thought that trusts are overused by some of the very wealthy. I’ll always say that. Because I believe that, ultimately, if you simply work through a company and you paid people as wagers, legitimate employees, you shouldn’t have to use a trust. Ever.

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