The Australian newspaper was highly critical of the Rudd government in 2008 for not clamping down on family trusts.
The government has yet to show it is serious about biting the bullet on the bigger tax-reform issues that have proved too difficult for successive governments in the past. These include the use of family trusts to shelter taxable income, an editorial in The Australian argued on June 18, 2008.
To be fair, The Australian has been bipartisan on this issue, castigating then treasurer Peter Costello for dropping trusts reform under political pressure in 2001, with its editorial arguing on March 13, 2001, that the Howard government had wrongly ditched plans to reform taxes on family trusts and has removed indexation on petrol excise. The cost to the budget in the next three years will be $2.7 billion money that could have been better spent on tax cuts for all or much-needed upgrading of the education system.
I am very happy to give credit to The Australian for being ahead of the game on trusts (and for recognising the need for increased education spending). But with the budget situation much worsened since then, the case for reforming family trusts is stronger than ever.
Labor is not the first political force to propose reforming trusts.
Costello as treasurer and Joe Hockey as shadow Treasury spokesman recognised the case for reform. But the Liberal and National parties wouldnt let them do what needed to be done. They could both tell you the political risk of tackling trusts. But it must be done.
The federal budget will not be returned to budget balance by half measures, taskforces or a politically safe road.
Labor showed last year that we are willing to take on difficult and risky political issues such as reforming negative gearing and capital gains tax.
Our plan to deal with discretionary and family trusts builds on that work. Our reforms will add $4.1bn to the budget over the forward estimates from the time of the next election and $17bn over the medium term. That is a serious contribution to budget repair.
To be clear, discretionary trusts do and will continue to play a legitimate role in the economy. They can be used for asset protection and succession planning. But they can also be used to minimise tax, and thats what needs to be fixed.
Defenders of the regime have to defend the status quo. The status quo is this: a standard PAYG (pay as you go) wage earner cannot use a family trust to distribute income to family members. But others can. And they can and do distribute income to family members who are in a much lower tax bracket, or most advantageously below the tax-free threshold.
While the social security system looks through trusts and assumes that distributed income is actually earned by the primary trust holder, the tax system does not.
These reforms will not affect 98 per cent of all individual taxpayers in Australia, with virtually all the revenue raised from people receiving discretionary trust distributions who have little or no other work income.
There is no question that trusts are used by overwhelmingly by higher income earners. The average private trust holding for the top 20 per cent of income earners is more than $120,000. The average for the next highest 20 per cent is just $4000.
Labor will continue to allow the legitimate use of trusts, but their use to reduce the tax bills of high-income earners must stop.
There is precedent for Labors policy. I mentioned two Liberal treasury spokespeople who tried to reform trusts and failed.
There is another who succeeded. Treasurer John Howard in 1980, as part of his crackdown on tax avoidance, applied a high marginal rate (now the top marginal tax rate) to trust distributions to children under 18.
Labors policy takes the same principle and applies it to discretionary trust distributions, but at a less punitive 30 per cent rate.
Vested interests and lobby groups (and the Liberal Party) were outraged at Howard but he persisted.
In the interests of budget repair and plugging a hole in the tax system which is available to few, Labor will persist as well.