Former Labor minister, Craig Emerson, has penned an article in The AFR today talking up Labor’s plan to tax discretionary trusts and chastising the Coalition for balking at reform when it was in office:
…two of the Coalition’s last three treasurers agreed that such action needed to be taken, only to shirk it.
As a young backbencher, I sat with Simon Crean across the parliamentary table from treasurer Peter Costello in November 2000, negotiating an agreement on business tax reform. Labor would support a cut in the company tax rate from 36 per cent to 30 per cent, together with a 50 per cent discount on the capital gains tax rate, if the government agreed to crack down on trusts and sham contracting. By reaching this agreement, the two major parties were adopting a broadly self-financing reform package based on a review of business taxation chaired by former president of the Business Council of Australia, John Ralph. Costello followed up by signing a letter to Crean.
Costello quickly reneged on the written agreement, leaving reform of the tax treatment of trusts in the too-hard basket. There it remained until April 6, 2011, when shadow treasurer Joe Hockey flagged a crackdown in an evening speech to the Institute of Chartered Accountants. Under pressure from the National Party and conservative Liberals, Hockey abandoned the idea the next morning. Borrowing the words of Peter Costello, used when describing a Mark Latham thought bubble years earlier, Hockey “couldn’t hold a policy from Lateline to lunchtime.”
Ironically, it was Liberal icon John Howard who had first acted on trusts, not as prime minister but as Malcolm Fraser’s treasurer. He legislated that distributions from trusts to children under the age of 18 would be taxed on a non-concessionary basis.
But the Howard amendment left unchanged the tax treatment of distributions from trusts to adult children, stay-at-home spouses, retired parents and other relatives. Smart accountants typically can find four or five adult members of an extended family in the lowest tax brackets for signing up as trust beneficiaries.
An ordinary wage or salary earner, who has tax automatically taken out of his or her pay packet each fortnight, has only one tax-free threshold, whereas a professional can gain access to four or five tax-free thresholds through the concessionary tax treatment of trusts. The result is that these two people, each earning the same income, pay vastly different amounts of tax.
Meanwhile, ABC’s The Business last night featured an interesting debate between the chief of the Council of Small Business, Peter Strong (arguing against Labor’s policy) and the chief executive of the Grattan Institute, John Daley (arguing for Labor’s policy):
John Daley made the far more persuasive case, in my opinion.