On the government’s inept response to Labor’s trust tax
Martin Gordon writes: Re. “Scott Morrison is doing Shorten’s job for him in selling a trivial trust tax” (Monday).
Bernard seems to have correctly identified a few issues with the Shorten tax proposals, and the Coalition’s inept response. Having read the TAI paper on trusts, and seeing tax assessing and social security means testing up close, I was amazed by Shorten’s revenue claims, but not surprised by his oversell or the inept Coalition response.
The revenue estimates of about $1 billion a year does not stack up (hence the 10 year projections, which looks like a ski ramp in profile), firstly as the income attracts tax now, and if the additional revenue is correct there must be a lot more beneficiaries than everyone thinks from income splitting. Exempting charities, disability trusts and farm trusts certainly suggests the ALP has learnt from its missteps in farm assets testing in the social security sphere. Incidentally the Howard Coalition Government can claim credit for ensuring that trust assets and private company investments were properly taken into account for social security eligibility, undoing a 17 year inequity created by the ALP.
The imagery of trusts being for rorting tax ignores estate protection as a primary motivation for farms in particular, but it is a handy way of protecting assets generally, plus a very common business structure. Bernard has hit on a good point, an agitated small business sector should not be discounted in its potency.
I am sure tax planners (who are very creative) will be looking at options like changing the character of trust distributions to salary and wages, which would give the impression of improving equality statistically and open up the bonus of access to concessional tax treatment on superannuation contributions!
The oversell of revenue and motives also applies to the negative gearing proposals of both the ALP and Greens. I personally favour a change of capital gains taxation back to taxing in-excess of inflation gains only (as is Access Economics Chris Richardson), but I oppose undoing a long term tax principle of allowing a deduction for expenses incurred in generating taxable income. There seems to be a static model mindset in place, which seems to assume that the market (and tax planners) do not respond to changes. All that will happen under the ALP and Greens proposals is that tax planners will change what their clients invest in. If housing becomes unattractive, then invest in something else. This of course will not improve housing affordability at all, and put a ding in private investment in rental housing.
The bottom line is that the revenue projections are optimistic and way off. I was bemused to see the Bill Shorten concerns about the level of and growth of federal debt, given that his parliamentary antics has helped it no end.
Ralph Brading writes: Re. “Scott Morrison is doing Shorten’s job for him in selling a trivial trust tax” (Monday).
The tired old cliches “class warfare” and a mangled version of “the politics of envy” predictably popped up in the Weekend Australian, and was noted in several places in today’s Crikey.
Knock it on the head with the following quote from Warren Buffet, one who should know: “There’s class warfare all right, but its my class that making war, and we’re winning.”
On Chris Lilley and Sacha Baron Cohen
Joe Boswell writes: Re. “If we find Chris Lilley’s blackface racist (and it is), what do we make of Sacha Baron Cohen?” (Monday)
While reading Luke Buckmaster’s succinct description of Sacha Baron Cohen’s character Borat it occurred to me there is an even more significant example of this comedy technique, so I changed the names in this extract from his piece:
Consider [Donald Trump]’s famous, decorum-obliterating [white American] character [POTUS], a feral misogynist and rampant [xenophobe]. In the many times when [POTUS] has elicited support from real-life Americans for his disgusting antics […] the real outrage comes not from [Trump], but from the sincere zealousness of the people around him…
This is dangerous terrain for any comedian. And, to be frank, probably not the sort of comedy anybody should be suggesting anyone make any more of. But at least with [Donald Trump] and [POTUS], there are meaningful layers to the satire — even if the cost of getting them means being exposed to grotesque caricature.
If only being exposed to a caricature was the whole cost we pay for Trump’s comedy. The laugh is on us.
@ Martin Gordon
I assume that you’re not an accountant because there is a fair bit of nuance that you’ve missed in your reading of the TAI paper.
I’m an accountant and am surprised that the projected revenue from Labor’s proposed changed are so low. The potential to reduce your income from income splitting is considerable for a suitably motivated group of taxpayers.
Charities and disability trusts don’t make taxable distributions of their surpluses (profit), so the changes are not going to affect them.
Using a trust to distribute its earnings as salaries or wages in the way you have described is problematic in a few ways:
1. You’d get caught out by the anti avoidance provision in the newly enacted legislation and/or the exiting general anti avoidance provisions in existing legislation
2. Paying a (potential) beneficiary a salary or wage would only be deductible against the taxable income of the trust if the salary payment was tax deductible for the trust begin with. In this case, the primary intent of paying the salary or wage would be to engage in income splitting, so the payment would not be tax deductible to the trust, and the payment to the individual would be taxable, rendering the arrangement worse than ineffective.
3. Making the assumption that the salary or wage payment was deductible, a payment to an associate has to be proportionate to the value of the services delivered, and would be taxable in their hands.
If as you hypothesise, housing become unattractive to investors and they park their funds elsewhere, this will take a lot of demand out of the market relative to stable supply, and prices will fall, resulting in lower prices and better housing affordability.
I agree with you about reverting to an indexation based CGT model.
When (unfortunately not if) aggressive tax advisors change their behaviour, we need to target whatever new method they employ with specific legislation, not fail to act on their existing practices “because they’ll just do something else when we ban this”.
My gut feel, without any factual basis, is that the ALP’s revenue projections from this trust change are way out on the low side.
Thank you for that, Grimace…I couldn’t see how the ALP would come out with the trusts policy before having it all checked by the Parliamentary Budget Office or similar organisation.
I’m not an accountant either, but my son is, and he agrees with what you have said!
As the only increase in tax collection can come from distributions made to individuals whose taxable income would be otherwise below $37,000 (putting aside for the moment any distributions to ‘small’ companies with a tax rate below 30% – and it is unclear at present where non business (investment) companies stand with respect to that) it is most unlikely that any tax gain will be anywhere near $1.8 billion a year. And that is before any account is taken of behavioural changes by the individuals concerned.
Your maths is a bit off their Fargo.
You are confusing marginal rates and average tax rates. Under the proposal, an individual gets hit with a 30% tax on their distribution, so for a person to lose 30% of their income to tax (including 2% Medicare levy) they have to be earning ~$157k.
The point of the exercise is to drive behaviour change – to prevent income splitting via trusts.
Re Martin Gordon’s response, there’s a bit of guff in there worth pointing out. Firstly, neither the Greens nor ALP policy on negative gearing concessions will undo the long held principle of allowing a deduction for expenses incurred in generating taxable income”. That will remain, but as in all other asset classes, can only be written off against that income, not your wage income as well. Secondly, in what market where investors stop investing will that NOT lead to increases in affordability? Every other market leads exactly to that place, via cheaper houses, or stock, or goods and services, that’s actually what markets do when they aren’t rigged.
And finally, that old chestnut of it ‘putting a ding in private investment of rental housing’. Oh crap. Over 90% of investment in housing is in existing stock, 93% was the last figure I read and it has been pretty static around that mark for ages. The Labor policy specifically excludes investment in new housing stock anyway, so your point is not made.
Apart from that, yes I agree that capital gains should be taxed in full less the inflation rate, so would go much further than Labor’s lowering of the capital gains concession..
Plus what grimace says, I have only just seen his post pop up on my screen. Cheers