Let’s not mince words, the “death tax” campaign begun by The Australian and the rest of News Ltd stable is a pack of lies and manipulative misinformation. It is best meet with facts and reassurance.
There is no death tax in the Budget. The changes to taxes on trusts only affect the very wealthiest of people. The changes to capital gains tax will not stymie innovation, send innovators offshore, or affect anyone unfairly.
The campaign is classic propaganda designed to scare and dupe people into voting against their own interests.
Indeed, there is a solid argument that if the changes to trust income went further it would benefit the great majority of Australia’s 16 million taxpayers.
The good way to inform ordinary taxpayers who have been duped by News Ltd and their hangers on in social media and the three conservative political parties is for them to ask themselves: “Do I have a trust or am I beneficiary of a trust? Do I understand what a trust is?” If the answer to any of those questions is No, then the Budget changes will not affect you.
Indeed, they will indirectly improve your position as the Government will get more revenue from the very wealthiest people to spend on things like health and education.
Let me explain why the measures do not go far enough and why there is no “death tax”. Apologies for some of the maths and the resort to legal concepts.
How do people use trusts to lower their tax liabilities?
Let’s take an example. A wealthy man (and they are usually men) with a wife and three children could put, say, $10 million into a trust. That would pay about $570,000 in interest each year. Without the trust that $570,000 would attract an income tax of 47 percent or $267,000.
With a trust, however, the trust would distribute the $570,000 three ways: $190,000 each to the wife and the two adult children who happen to be at university earning no other income. The $190,000 would be taxed in their hands and would come to $54,538 each or a total of $163,614 (instead of $267,000) – a saving for the family of $103,386 in tax.
Now you can see why very wealthy people love family trusts. They can split their income up among spouses and children and grandchildren aged over 18. That pushes a lot of family income down into much lower tax brackets.
But Treasurer Jim Chalmers and his Budget have now come along and said the wife and children must, in effect, pay 30 per cent tax on the first $45,000 of their $190,000 instead of the current tax rate of zero on the first $18,200 and 16 percent on the next $26,800.
It means they pay an extra $10,112 tax each. So, the family in total would pay an extra $30,336 in tax on the total family trust income of $570,000.
Instead of saving the family $103,386 in tax, under the new rules the trust arrangement would now save the family only $73,050.
The headline is that (with a little rounding) a trust distribution of $190,000 – the point at which the top marginal rate kicks in – loses just $10,000 of its previous $35,000 worth of tax avoidance under the new arrangements.
And still they squeal. These selfish people should stop their whingeing.
It is still a big tax-avoidance scheme and you can see why I say the Budget did not go far enough.
It is not communism as depicted by News Ltd. Trusts will remain a shocking rort for the uber wealthy and a blot on our tax system The vast majority of Australia’s 16 million taxpayers who know nothing about trusts should be cheering Chalmers on and urging him to go further and to get more revenue in for the things they need.
For those ordinary taxpayers, there are no trusts. Their interest payments, however small, are picked up by the ATO by data-matching and auto-filled into the income side of their tax return and taxed at their marginal rate.
Of course, our wealthy taxpayer could still get the low-tax result without using a trust. He could just split up the $10 million and give it to the spouse and children. But the wealthy (mainly men) do not do that because they like control and to control the distribution because they can threaten withdrawal of income if they don’t get their way in other matters.
Moreover, in our example, when the eldest child leaves university and starts earning an income and the third child turns 18 and goes to university, the $190,000 a year can go to the third child. And the rort would continue.
As to the “death tax”, it is quite simply false. There are new rules for the 10,000 or so testamentary trusts bringing them in line with other discretionary trusts. There is no tax on death. The only tax is on the income and the realised capital gain made by the trust. There is no separate tax on the base capital itself; that would be a death duty.
Again, ignore the pernicious Murdoch scare campaign if you are not one of the one in 30,000 people who have a testamentary trust.
As to the capital gains tax changes “killing the entrepreneurial spirit of young people”, again it is hyperbole and exaggeration. The Beatles did not stop singing when their marginal tax rate went to 97.5 percent (19/6 in the pound). To the contrary, in 1966 they protested with the song Taxman (“There’s one for you and 19 for me.”)
True, the 97.5 per cent rate was extortionate, but even that did not stymie the entrepreneurial spirit.
The new tax arrangements will not send innovators offshore because nearly all OECD countries and most other countries have tougher capital-gains tax regimes than Australia. And most also have real death duties, not ones imagined by the Murdoch media.
I like wealth and have no problem with people accruing it, but people can only create wealth because governments and society in general provide police, defence, roads, health and education that underpin the wealth-making process. Therefore, the people who make the wealth should pay a fair share back so others, too, can do the same thing.
Crispin Hull is a former editor of The Canberra Times and regular columnist.