Are parties really committed to tax reform?

Of late we’ve seen both the major parties make their case for changes to the tax system. Whilst tax reform has been part of the political, business and social landscape for many years, the commitment of government to tackle this issue head on has been somewhat “lukewarm”. One can understand that from a political perspective  addressing wholesale tax reform can be difficult when you do not have a majority government, or the public have become disenchanted and their votes continuously “swing”.
As much as we may not be willing to admit this, some commentators suggest that our Kiwi cousins on the other side of the Tasman have been far more progressive in addressing reform of the regulatory, business and tax system. From their much earlier negotiation of Free Trade Agreements, to earlier adoption of the GST (much of which we adopted ourselves), to wholesale changes to their GST rate and personal income tax rates, there are lessons we can learn from them.
This leads us to question the appetite of the major parties to meaningfully address tax reform, when elements of numerous reviews of our tax system have been cherry picked and calls from the tax profession to address the major issue of GST, capital gains tax and income tax rates are often overlooked.
The latest case in point is the recent announcement on the plan to tax trust distributions at 30%, similar to the proposed reforms back in the early to mid 2000’s. Bill Shorten’s words are “…every year in Australia there are some fortunate high-income earners who use discretionary trusts to park their money in a lower tax bracket. And the rest of the community are left to subsidise this, most of this is completely legal, but that doesn't make it right, that doesn't make it fair. Our system should not be subsidising upwards.”
Unfortunately, in our view, this statement is flawed and full of misconceptions around the use of trusts. As tax professionals we can tell you most trusts are used by small business owners who run modest businesses, work long hours each week “wed” to their businesses and form an essential part of not just tax management, but asset protection. In addition to this, our tax system is filled with complex integrity rules that prevent the use of trusts to split the income of high income salary earners, lending of monies to related parties and capping of tax at the corporate tax rate. The sad truth is, those most affected by these changes are not going to be the wealthy, but small business owners, who coincidentally are the largest employer in the country.
This case for change also assumes a very simplistic change to trust arrangements, but just some of the complexities that have already been identified by the tax profession include:
  • How do you justify treating farmers differently from business owners?
  • This proposal results in over-taxation for business owners compared to alternate structures, how is this equitable?
  • Who pays the tax (trustee or beneficiary)?
  • Trusts are not simple, they are very complex. How do you deal with the different trust structures?
  • How will the current streaming and flow through arrangements for trusts work?
  • How will distribution of assets from trusts work?
  • How do you deal with the complexities of income distributions from trusts that the ATO has only tried to clarify over the past 5 years (and is no less complex)?
The major parties seem to have a commitment to announcing what they think disenchanted voters want to hear. What seems sorely lacking is a real commitment to tax reform.