Today Labor is announcing new plans to improve our tax system so that it is fair for all Australians. A Shorten Labor government will introduce a standard minimum 30 per cent tax rate for discretionary trust distributions to mature beneficiaries (people over the age of 18). Labor’s policy will tackle the use of income splitting to minimise tax—making the tax system fairer and improving the budget bottom line.
Australia currently has a two-class tax system. While most people pay the tax that they owe through normal PAYG arrangements, the system includes generous subsidies and loopholes which allow some wealthier people to minimise their tax. Wealthy individuals are much more likely to benefit from a trust than low and middle-income earners. The average amount of money held in private trusts by the wealthiest 20 per cent of households is $123,000, while for the next wealthiest quintile it is just $4,000.
Individuals and businesses use trusts for a range of legitimate reasons, such as asset protection and business succession. But in some cases, trusts are used solely for tax minimisation. Discretionary trusts allow for trust income to be distributed on an entirely discretionary basis. This means distributions can be artificially split between different people in lower tax brackets so that the tax paid on the overall amount is much less than it would otherwise be.
While artificial income splitting is completely legal, that doesn’t mean it is fair. Ordinary PAYG workers do not have the option of artificially splitting their income among different family members to lower their tax bill. Labor wants to change the system so that PAYG taxpayers aren’t subsidising the tax breaks of much wealthier Australians. Under Labor’s policy, individuals and businesses will still be able to use discretionary trusts. However, the new minimum 30 per cent tax rate on distributions will make sure discretionary trusts cannot be used as a vehicle for aggressive tax minimisation. Labor’s policy builds on the reforms of former Treasurer John Howard in the early 1980s. Mr Howard cracked down on artificial income splitting to minors by taxing distributions at the top marginal tax rate. Labor’s policy extends this principle to adult beneficiaries, but at a less punitive rate of 30 per cent.
Today’s announcement builds on Labor’s bold and progressive proposals on tax reform—including superannuation, negative gearing and capital gains tax, and tax affairs. These issues have been kept in the ‘too hard’ basket for too long. Labor is changing this. Labor’s changes are about making sure trusts serve their true purpose—not as a tax minimisation tool. This policy is well targeted to address tax minimisation and artificial income splitting. These reforms will not affect 98 per cent of taxpayers in Australia.
Under Labor, individuals and businesses can continue to make use of trusts—and trusts will not be taxed liked companies. Labor’s policy only applies to discretionary trusts. Non-discretionary trusts—such as special disability trusts, deceased states and fixed trusts–will not be affected by this change. Labor’s policy will also not apply to farm trusts and charitable trusts. Similar to John Howard’s reforms, exemptions will apply under the new arrangements, such as for people with disability, to ensure people suffering genuine hardship are not affected. The ATO Commissioner will be given discretionary powers to manage this.
Labor will also provide an additional $55 million per year to the Australian Taxation Office to boost its current trust anti-avoidance activities. This policy has been costed by the independent Parliamentary Budget Office. It is estimated to raise $4.1 billion over the forward estimates to 2021-22 and $17.2 billion over the medium term.
Labor believes there should be one tax system in Australia—one that is fair for everyone.
Bill Shorten was the national leader of the Labor Party. This statement was released on Sunday 30 July 2017 as 'A fairer rax system for all Australians', during the NSW ALP Conference, More information on Labor’s plan can found here.
Shorten, Bill, 'A big blow for fairness', Evatt Journal, Vol. 16, No. 4, September 2017.<https://evatt.org.au/a-big-blow-for-fairness>