The ALP wants to impose a 30 per cent tax rate on family trusts.
The ALP has pledged to crack down on wealthy Australians who use family trusts to avoid paying income tax.
A research paper by The Australia Institute (TAI) has revealed that billions of dollars of tax revenue is being lost due to wealthy Australians abusing family trusts.
According to the report’s author David Richardson, tax avoidance using private trusts (mainly discretionary trusts) is estimated to cost the government at least $3.5 billion in lost taxes every year.
To try to address the issue, Opposition Leader Bill Shorten outlined a plan to impose a 30 per cent tax rate on distributions from family trusts.
To use a trust to minimise tax, a high income earner funnels all of their money into a trust account, to be split among family members with the lowest incomes, who are taxed at a lower rate. Instead of being taxed at 45 per cent, on all income above $180,000, all members of the family receive up to $18,200 tax free and after that they are then charged at a lower tax rate than the original 45 per cent.
Australian Taxation Office (ATO) data reveals there were 642,416 discretionary trusts in Australia in 2014-15, almost twice the number from two decades earlier.
The Labor proposal would target high-income earners who use trusts to split money to other family members in lower tax brackets.
"Every year in Australia there are some fortunate high-income earners who use discretionary trusts to park their money in a lower tax bracket. And the rest of the community are left to subsidise this," Mr Shorten said.
"Most of this is completely legal, but that doesn't make it right, that doesn't make it fair.
"Our system should not be subsidising upwards."
The ALP estimates that its changes to family trust taxation would raise $17 billion in revenue over the next decade.
The Federal Minister for Finance Mathias Cormann, attacked Mr Shorten’s proposals as the politics of envy.
“We can't fall for the proposition that a tax grab here and a tax grab there, increasing the overall tax burden in the economy and targeting those who are seen to be more successful, will help solve all our individual problems,” Mr Cormann said.
The Government’s response to Bill Shorten’s proposal is worrying. The use of family trusts by the wealthy to avoid paying their fair share of tax is a well-known problem, and this is a legitimate opportunity to address it.
Unfortunately, it appears the Government would rather play politics and score points than address the issue and work collaboratively with the Opposition on a solution that could be a huge boost to the budget bottom line.
The family trust problem is only going to grow in the coming years. The Government has taken significant steps towards closing superannuation tax minimisation schemes for high income earners recently, but there is a risk that those people will now turn to private trusts to avoid paying their share of tax.
The proposed changes make the tax system more transparent and equitable but the Government’s response seems to run contrary to these goals. It borders on condoning tax avoidance.
The use of family trusts to minimise tax is heavily skewed towards the wealthy. The Australia Institute’s research revealed that people on incomes above $500,000 a year received 51 per cent of the benefit from trusts while representing just 0.43 per cent of the population.
In contrast, people earning less than $180,000 a year – 96 per cent of the population – received just 13 per cent of the benefit generated by trusts.
What do you think? Have you used or do you currently use a family trust? Do you support the ALP’s proposed tax changes?