The eyes of the average PAYE taxpayer glaze over at the mention of transferable losses of family trusts. They know that some wealthy people use accountants and lawyers to set up elaborate arrangements to avoid tax and that others avoid tax through the black market cash economy, but are not especially interested in the detail. Rather they expect their elected representatives to work for a fair tax system. But their faith and trust is wearing thin and their suspicion of “”tax reform” is increasing. And events of the past week can only increase the cynicism.
In the past two years the Coalition has mouthed the platitudes of cracking down on tax evasion, meanwhile it has delayed it, diluted it or actively enabled in the most shameless way. Because the details of family trusts and tax law are so difficult, most ordinary voting PAYE taxpayers are oblivious of the extent of the hypocrisy.
In 1995 Labor introduced a Bill to clamp down on trusts engaged in tax avoidance. It was delayed in the Senate and lapsed at election time. The Coalition has taken 18 months to bring the Bill back, with much grandstanding a rhetoric. And even after all this dragging the chain the Bill is not the same. The new Bill still enables large scale tax-avoidance among close family members.
Individuals pay tax against their overall income. A trust is different. It can earn profit and little or no tax is paid unless there is a pay-out to a beneficiary. Some trusts make a loss and receive an injection of money from family members which would otherwise have attracted tax. The money sits in the trust until it can be paid out on a tax-free or low-tax occasion. The trusts can build up their capital without paying tax, only paying out to family members who have made little or no other income in the pay-out year. Some pay-outs are made in the form of very-low-interest loans which are not taxable income even though the recipient would treat the money as spendable on ordinary living.
The overall effect is for the family trusts to spread income among many people in a way that attracts the least tax. Trust losses are buyable to reduce income and the incidence of tax.
The arrangements are a sham. Companies and individuals, especially PAYE taxpayers, would not get away with them. Why should a wealthy tax-payer be able to use a family trust to split income and reduce tax when a couple with one working PAYE taxpayer cannot?
John Howard’s professed concern for the battler is humbug.
The hypocrisy of the Coalition is that between 10 and 20 members of the ministry have family trusts and stand to benefit from the Coalition’s watering down of the original proposals to tighten up tax avoidance. It is, at the least, an indirect conflict of interest.
There is a broader, more worrying, aspect to the saga. It is about trust in government. The Howard Government, quite courageously, has put broad tax reform squarely on the political agenda in the lead up to the next election. Australia must have a more efficient, fairer tax system. To achieve it will require a lot of give and take by sectional interests in the broad interests of the nation. It will also take a lot of trust, especially on the part of PAYE taxpayers and welfare recipients who rightly will not have a bar of a GST (which would be in the national interest) unless they can trust the government to give adequate compensatory and anti-avoidance measures.
If the shabby conduct over family trusts is a guide, who would blame them for not having that trust.