Daily Archives: April 10, 2011

WHO DO YOU TRUST? Liberal wets slip on tax reform

TrustTrusts aren’t taxed for good reason. They are a tool for families and business to pool income ahead of its distribution to individual taxpayers. At the time the loot is distributed, tax is payable.

The federal government would trigger great outrage if it attempted tax trusts and then tax the “beneficiary” again because it would be double-taxing the same money.

No government with any political sense or sense of fairness would contemplate it.

In Australia, trusts are a commonly used tool for distributing income around family members who, for example, collectively work on a family farm. There’s nothing radical, aggressive, unreasonable, shady or dodgy or unfair about  using them at all.

You can’t use them to pool money and keep it from the tax-man. It’s not really a lurk, again, it’s merely of way of distributing money across a group, usually a family.

Because of that no credible or serious person in politics or the tax reform debate wants trusts taxed.

There are many strict rules as above about their use that make them quite ineffective for avoiding tax. At the core of that is the obligation that their income has to be distributed to someone. And, yes, that someone is going to have to pay tax.

So again we note that no serious or credible person in this debate wants trusts taxed.

Which brings us to Liberal wet stalwart, leadership aspirant and Shadow Treasurer Joe Hockey.

Hockey’s ill-considered thinking-out-loud on the issue this week was probably the worst moment of his recent parliamentary service other than his abortive and mishandled run for the leadership. Colleagues were appalled.

The anti-Abbott majority in the Liberal party room hangs like the Sword of Damocles over the formidable Leader and could – in theory – be used at any time by Hockey. But it probably won’t be after this week. He really let himself down.

So much so even the Liberal-friendly website – usually excellent reading by the way – Menzies House whose people know they’ll get into Press Gallery bother by criticising Liberal MPs by journos falsely crediting their work to Senator Cory Bernardi who helped launch the site had a crack at Hockey over it. Few could blame them.

The National party went into a quiet rage over it. Most of Hockey’s mates just shook their heads in despair. Poor policy. Brain-dead politics.

His unlikely cheerleader, the lovable award-winning journalist and usually sensible refugee from Liberal wetdom, James Campbell even got in on the act today.

The gents’ arguments in favour of taxing trusts would not pass muster at a Labor Socialist Left faction meeting (these days).

We particularly enjoyed Campbell’s argument which could easily have been borrowed from a Joan Kirner speech (and probably was):

But there are other things about trusts that are objectionable – the ease with which they can be used to disinherit children or to stop the Family Court giving women a fair shake of marital property. Never mind the fact that they are the best way of hiding who really owns things.

Grown-ups of course know that is easy enough to disinherit the kiddies if you really want to do so, subject to the normal operation of succession law, by changing your will at-whim. We know some families where the patriach will tweak the document after every extended-family gathering to keep everyone in their place. If you’ve got it, flaunt it, we say. Campbell perhaps envisages a more socialistic approach, we’re not sure.

And there hasn’t been a trust yet devised that the comrades on the Family Court bench won’t look behind to carve up the matrimonial assets. The only obnoxious bloke able to sort out the court and his surly wife in recent times was the subject of Saturday’s Herald Sun splash. The charmer sold up all the assets (that would otherwise have been subject of Family Court carve-up) and gave away the hundreds of thousands of dollars to a variety of charities and others. Don’t think he’ll be mentioning any of that on his next round of first-dates.

We are advised that Campbell went to Melbourne Grammar, before slumming it at Cambridge and going on to a stellar career as an award-winning journalist and challenging columnist. And we suspect as a result of all that he must know more than a few happy chaps who have family trusts. No doubt there are occasional aspects of their Hooray Henry behaviour a reasonable person would find deeply offensive but not paying enough tax as a result of using a trust here is almost certainly not one of them.

Joe Hockey – a similarly nice bloke by all accounts – went to a flash school too, St Aloysius’ College right on Sydney Harbour. While not as pricey as Grammar, it runs to twelve grand a year apparently.

Beefy Joe got quite the grounding in rugby union but seems to have missed out on tutoring in political substance or economics.

He didn’t consult with the Nats about the impact of his policy thought-bubble on farmers and small-businesspeople. He didn’t reflect that not even Ken Henry’s tax review that contemplated many unpopular reforms but concluded trusts ought be left alone. He was just thinking out loud and, what’s worse, was attempting to tell his accountant and economist wonk audience what he thought some might want to hear.

For serious people, there is a lot of reform left to do in our tax system and more generally.

We strangely exempt food (uncooked food) from the GST. Why? Because it was a John Howard political fix to get his legislation up. It’s a strange exemption and it would raise a lot of money obviously if it were lifted. The economic arguments for exempting one significant area of spending like this are nil.

We’re just warming up. Currently we allow Old Grammarians and others climbing the ladder of opportunity to deduct their income losses on investment properties while they get to trouser the uncrystalised and therefore untaxed capital gains on those properties. That little lurk is thought to cost the taxpayers about $10 billion a year. Campbell’s guess about the cost of trusts is $700 million. In Canberra terms, the equivalent of parking meter money left in the car ashtray.

While we’re at it, exempting principal places of residence from capital gains tax is an easily and frequently corrupted tax dodge that enables sleazy billionaires like Sol Lew to pay nothing at all on multi-dollar profits on the sale of their mansions. There is no sensible economic reason for exempting profits on residential property from CGT, just good politics.

There are many other suggestions we could make while in armchair quarterback mood. Of course, many Libs ponder wistfully the imagined joys of labour market deregulation, not of the over-centralising Workchoices kind but a fully-fledged let-the-market-rip type. Of course that would make militant construction workers even richer and shaft the battlers just that little bit more but that is certainly their keenest of reform fantasies. We all have them. Trusts is just not really part of that debate among the intellectually fully-functioning.

None of them will happen. At least in the immediate future. A VEXNEWS government remains rather unlikely.

The federal government is not led by courageous reformers, with a few honourable exceptions, Conroy’s courage and success in addressing market failure in our internet infrastructure being principle among them. Their Opposition is led by folk with no appetite for economic reform at all. Abbott is infamous for it, in Liberal circles, he’s regarded as a reincarnation of BA Santamaria in ripped fitness fanatic form.

But those with an appetite for change should give serious thought to how we could make our tax system fairer and better.

The proceeds from eliminating just a few rorts of the kind we occasionally bleat about in Brunswick coffee shops could be used to align the top income tax rate with the company rate to end the incentive many people have to operate as a company when they could easily trade as individuals but incorporate as a tax dodge.

Our notional tax rates are really high by international standards but the effective rates are not. We are not a heavily taxed country which is part of the reason for our prosperity. But we could do better. We could cut out many middle-class rorts out of the tax system, reduce the complexity, use the rorts-cutting proceeds to make the income-tax-scales flatter and simpler and shift a lot of the brain-power that is engaged on reducing tax liabilities into more productive areas of the economy.

Joe Hockey’s thought-bubbles don’t progress the debate further. Cheap shots from his wet comrades who don’t possess the full arsenal of intellectual ammunition needed to engage in serious tax reform debates just make them both look a bit silly.

Even if they both are cuddly.

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