As the Coalition government works itself into a lather over Labor’s plan to repair the income tax base by changing the rules for family trusts, it will be hoping no one remembers that 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 6 April 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.
The government is already attacking Shorten’s announcement on trusts as another Labor tax slug. This from a government that is relying overwhelmingly on bracket creep on ordinary wage and salary earners to achieve its assumed return to surplus in the final year of the four-year budget period. In the government’s book, it’s okay to fund a return to surplus on the backs of pay-as-you-go wage and salary earners while leaving family trusts alone.
Shorten and shadow treasurer Chris Bowen have indicated that the proceeds of the family trust reforms will overwhelmingly be devoted to budget repair. An alternative use might have been to offer tax cuts to pay-as-you-go taxpayers. But there are so many of them that their income tax cut would be derisory, not enough, in the words of another former Liberal minister, to “buy a sandwich and a milkshake.”
Comprehensive tax reform, based on the principle of broadening the base to lower the rates, will have to wait, but that doesn’t mean no reform should be done in the meantime. In the aftermath of the disastrous 2014 budget, John Howard told the National Press Club that if budget repair were to gain community support, it needed to be judged as being fair. Reforming the tax treatment of family trusts and devoting the proceeds to budget repair is both fair and economically responsible.
The test for the government will be whether or not it can engage in sensible debate and resist the deployment of three-word slogans, such as ‘Labor’s housing tax’, which it applied to the opposition’s policy on negative gearing. Who knows, it might find the political courage that John Howard showed in 1982 but which Peter Costello and Joe Hockey lacked all those years later.