Another month, another vote-pulling headline from our political leaders aiming to polarise the community once again. This time it’s the federal Opposition planning to crack down on wealthy Australians avoiding tax through family trusts.
Sure, I get it. People with lots of money shouldn’t be able to get more breaks than the rest of us. I agree, no question about it. A policy to address this area is overdue. Everyone should pay their fair share – there should be no extra advantages. But does this have to become a political battleground?
Before we fall for media lines about the “rorts of the rich and powerful”, we need to examine some facts, including figures showing around two-thirds of the 500,000 trusts affected by this proposal are actually held by small businesses, not billionaires.
Imposing a 30 per cent tax rate on these kinds of trust structures seems reasonable: after all, it’s in line, more or less, with rates paid by those earning a little more than the average wage at $87,000. They offer the capacity to split income that is not available to the average employee. However, I still have issues with the way Labor leader Bill Shorten has sold this idea to the public.
Here it is in a nutshell: trusts are not just for the uber rich. In fact, those with really eye-watering amounts of money will often use other structures that are far more effective than simple family trusts with mum and dad beneficiaries (think bucket companies or off-shore structures, for example).
Most business owners use the trust structure for legitimate reasons which includes not just distributions to family members (which enables income splitting), but also for estate planning and asset protection.
There’s far too much vitriol around “inequality” issues fanned by both sides to divide the nation. Many everyday people have trusts and family businesses operating this way usually aren’t trying to do anything wrong.
But the bitterness around addressing this issue has the potential to turn it into something bigger than it is, and that masks the real reform issues that we should be tackling.
It’s really no wonder then that people grumble and complain about tax.
Labour claims around $4.1 billion over the forward estimates will be raised by their proposal. But, remember, the government still raises much of its revenue from our extremely high income tax rates.
If we want to create a fairer tax system, we should use any revenue raised by this policy to reduce marginal rates. This is the real elephant in the room. The rich vs poor debate just polarises society and we miss the bigger picture.
If we think a 30 per cent tax on trust income is fair, are we saying that anyone who earns more than $87,000 is “rich”? That’s where the 39 per cent tax rate, which includes the Medicare levy, begins to kick in. And if you reach $180,000, you are effectively paying half of what you earn in tax. Do we think a family bringing in $180,000 a year, for example, is super rich? These are the kinds of issues that need to be addressed.
Thinking ahead, I would rather tie the trust rate to the company tax rate as a better tax policy (I can see the hurdle-jumping now to save the extra 2.5 per cent).
It’s really no wonder then that people grumble and complain about tax. Australia has done little to address these issues with wider reform, unlike other countries like New Zealand, Singapore, the UK, and the US. We still keep hitting up those in the middle-income brackets until they are carrying the full load for the country. It’s not sustainable and hardly conductive to voluntary compliance in the future.
So, yes, bring in a 30 per cent tax on family trusts – but don’t kid yourselves this is about inequality or levelling the divide between the super rich and the poor. It’s going to affect many businesses owners in the South Australian economy, most of whom are not wildly wealthy.
Ultimately, it’s just one policy, not the extensive recalibration we really need across the board.
Andrea Michaels is a tax law and family business specialist and the managing director of Adelaide firm NDA Law.
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