Trust in trusts is broken. ACOSS calls on Federal Government to implement trusts reform

ACOSS calls on the Federal Government to work with the Opposition to reform trusts to increase transparency, fairness and much needed revenue for essential services.

“We welcome the Federal Opposition’s announcement of policy in this area. If implemented, the Opposition’s proposal would be a big step towards improving the equity and transparency of our tax system,” says Dr Cassandra Goldie, CEO of ACOSS.

“We urge the Federal Government to also take the need for reform in this area into serious consideration.”

ACOSS has consistently argued that, along with superannuation, negative gearing, and loopholes in Capital Gains Tax, the tax treatment of private trusts is a major problem, enabling people with higher incomes to avoid paying their fair share of tax, and skip out on contributing to Australia’s revenue.

“It is unacceptable that while most people pay income tax at their marginal rate, a minority are able to use private trusts and companies to significantly reduce their tax contribution. This means the rest of us must contribute more in order to fund essential services.

“This tax avoidance has gone on for too long. Reform it is not about envy, it’s about fair taxation.

“ACOSS has called for curbs to tax avoidance using private trusts and companies for two decades, from when former Prime Minister, John Howard took a major step in that direction but then faltered.

“The job must now be completed to ensure everyone pays tax at their proper rate.

“There can no longer be one rule for high income earners who can afford to buy smart advice and purchase trusts and another rule for everyone else.

“There is no single solution to this complex problem but a reform agenda should be widely welcomed.

“In our Federal Budget submission (2017), ACOSS has been advocating taxing private trusts as companies so that the trust is taxed at the company tax rate.

“Other options include taxing trust income in the hands of the individual who controls it (as we already do for social security purposes), and extending Capital Gains Tax to un-taxed income distributed to beneficiaries of discretionary trusts (as already applies to fixed trusts).

“If implemented, it would help curb the most egregious tax avoidance strategies using private trusts.

“It’s important that all practical options remain on the table to closing off remaining loopholes in the tax treatment of trusts.

“It is also vital to follow through the tax transparency agenda governments have been pursuing internationally in the wake of the Panama Papers exposures, and require trustees to reveal the controllers and ultimate beneficiaries of trusts. Otherwise we can’t be certain new laws will be properly enforced.

“Reforming discretionary trusts will be opposed by powerful interests, as it always has been.

“However, before interest groups oppose proposals to deal with private trusts, they should consider what has already been done in the name of ‘budget repair’ including cutting the incomes of people already living in poverty and defunding community services for people who are the most disadvantaged in Australia.

“Tightening the tax treatment of private trusts is seriously overdue.

“The public must be confident we are all contributing our fair share to the budget to meet community needs.

“We call on the Federal government to implement urgent reform for a fairer system for all,” says Dr Goldie.

Key points:

  • Australian Taxation Office data reveals almost 643,000 discretionary trusts in Australia in 2014-15, almost twice the number from two decades earlier. Just over half are passive investment trusts while just under half are trading trusts for active businesses. In 2013-14 their total taxable income was $80 billion.
  • Beneficial ownership of trust assets is highly concentrated in the top 20% of households by wealth.
  • Tax avoidance using private trusts (mainly discretionary trusts) is estimated to cost government at least $2 billion in lost taxes every year, though not all of this would be recouped by tax reform as people may shift to other tax shelters.
  • About half of all trusts are not assigned to an industry by the ATO, which suggests they are investment rather than trading trusts. Of those whose industry is identified, less than 5% are farm trusts.
  • The problem with private trusts is not that people use them: it’s that their tax treatment is extraordinarily weak, compared with individual taxpayers and companies, and more generous than in other wealthy countries.
  • As other tax shelters such as superannuation are curbed, there is a risk that even more people will turn to private trusts to avoid tax unless action is taken.
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