A crackdown on people using trusts to avoid paying income tax is not only fair, it will stop more than $17 billion leaking out of the federal budget, Labor argues.
The opposition has unveiled plans to impose a 30 per cent tax rate on payments to adults from discretionary trusts.
It says this will curb the legal but unfair practice of high income-earners funnelling money through trusts to lower-earning family members, thus avoiding paying top tax rates.
“The lucky few, riding the business end of the tax system are able to opt out of paying taxes,” Opposition Leader Bill Shorten told reporters in Sydney on Sunday.
“Nice deal if you can get it! The real challenge here is that we want to create one system for Australians.”
The 30 per cent level is just below the second marginal income tax rate, paid by people earning less than $87,000 a year.
The policy will “prevent leakage” in the billions from the federal budget, adding $4.1 billion to commonwealth coffers over four years and $17.2 billion over a decade, Mr Shorten said.
Shadow treasurer Chris Bowen issued a challenge to the Turnbull government.
“Either come out today and defend income splitting, defend the current arrangements and promise no change, or admit there’s a problem and look at adopting Labor’s proposals,” he told reporters, anticipating the government would opt for a scare campaign.
Finance Minister Mathias Cormann offered a flavour of the response on Sunday morning, though conceded he didn’t know the full details of Labor’s policy.
“This is ultimately going to be a tax hike in particular on the many small business operators across Australia who use trust structures as a legitimate way of managing their financial affairs,” he told Sky News.
“They will want to see how Bill Shorten thinks he’s going to be able to take $17 billion out of their pockets.”
He said trusts were predominantly used for legitimate purposes and there was an integrity taskforce within the tax office to rout out the rorters.
Mr Bowen acknowledged there were legitimate uses, such as asset protection for small business owners or succession planning.
Labor’s “carefully calibrated” changes shouldn’t affect these.
“There are many, many hundreds of thousands of small businesses in Australia and most don’t use discretionary trusts,” he said.
“Where a small business is employing a family member … they will or can pay them a wage and of course they’ll be taxed at the normal rate and they can claim the tax-free threshold, there’s no change.”
Farm trusts, charitable trusts, disability and those set up to manage deceased estates will be exempt.
There are about 642,000 discretionary trusts operating in Australia and Labor estimates its policy will affect 315,000 of these – and 98 per cent of taxpayers will see no change.
Left-wing think tank The Australia Institute says there has been an explosion in the use of discretionary trusts in recent years and they now hold more than $3.1 trillion.
Income from trusts overwhelmingly flows to the wealthiest Australians, director Ben Oquist told reporters, with more than half going to the top 0.5 per cent of the population.
“It’s time something was done about them. This is a modest step in the right direction by Labor today,” he said.