Labor’s crackdown on family trusts a ‘tax grab’, Coalition says

Labor will impose a 30% tax rate on distributions from discretionary trusts in an effort to crack down on income splitting and aggressive tax minimisation by high-wealth individuals.

Bill Shorten unveiled Labor’s new policy at the New South Wales party conference on Sunday. The measure is expected to raise $4.1bn in revenue over the first four years and $17.2bn over the medium term, and take effect from 1 July 2019.

The new tax rate will apply to trust distributions to beneficiaries over the age of 18.

It will not apply to non-discretionary trusts, such as special disability trusts, deceased estates and fixed trusts, nor will it apply to farm or charitable trusts – carve outs which will likely reduce some of the political backlash to the measure.

Discretionary trusts are used by high-income earners to distribute investment income to beneficiaries on lower marginal tax rates, in the process reducing the overall amount of tax paid.

In address to the NSW conference on Sunday, Shorten pointed to significant growth in the number of discretionary trusts since the late 1990s, and he characterised curbing tax minimisation as an important principle of fairness.

The Labor leader said the country should have “one, clear, fair system” with consistent rules. “It’s about delivering a level playing field – so high-income earners can’t opt out of paying income tax,” he said.

Shorten said more revenue needed to be raised in order to protect Australia’s triple-A credit rating, and the revenue needs to come from people who can most afford to pay.

“Every year in Australia, there are 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,” the Labor leader told the conference.

“That’s not fair on Australians who’ll never be able to afford this option.”

The Turnbull government moved quickly on Sunday to characterise the new Labor policy as yet another “tax grab”.

The finance minister, Mathias Cormann warned the measure could have a significant impact on small businesses. “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.

“It will be very important for small businesses across Australia in particular to see the detail.”

Cormann said Labor’s measure was “another tax grab on top of all of the other tax grabs that Bill Shorten has announced so far”.

The shadow treasurer, Chris Bowen, said Labor had predicted a scare campaign from the government to try to “mislead small-business people”.

“I saw Mathias Cormann this morning saying that all $17bn will come from small-business people,” Bowen told the ABC.

“I make this point – 98% of taxpayers are unaffected by this. Around 315,000 trusts will pay more tax, or the beneficiaries will pay more tax as a result of this.

“So for the government to engage in that scare campaign, we’re ready for it.”

He said the $4bn saved by the proposed trust changes would be used for budget repair and “to fund important social investments”.

Bowen ruled out the introduction of an inheritance tax.

Shorten has been under sustained internal pressure to make Labor’s economic and tax policy for the next election more progressive, with some of his own MPs arguing the ALP should impose a minimum tax rate on wealthy people – a so-called “Buffett rule”.

Given Labor has also signalled big investments in priorities such as schools funding, and has shown a general reluctance to cut expenditures, the party will also have little choice but to pursue new revenue raising measures to fund its next federal election offering.

The new trusts measure, and other policies Labor has unveiled in recent months, such as capping tax deductions for accountancy to $3,000, will limit some of the options high-income earners currently have to minimise their tax liability.

Figures from the Australian Taxation Office for the 2014-15 financial year, released in April, showed that 48 Australians who earned more than $1m paid no income tax at all.

Nineteen reduced their taxable income to zero by claiming a combined $20.2m for the “cost of managing tax affairs” – nearly $1.1m each. Nine claimed gifts or donations worth $27.5m to help them do so.

John Howard first addressed the problem of income splitting in the early 1980s, deeming that income distributions to dependents, including from trusts, were taxed at the top marginal rate.

But current rules allow income to be diverted to other family members, such as stay-at-home mothers or fathers, or to dependents over the age of 18, such as children at university, college or Tafe.

Sunday’s crackdown on trusts will be followed in the coming week by Labor flagging changes to the workplace relations framework. Trade unions have been lobbying Labor to look at labour laws for the next election.

The Turnbull government has attempted to rebut Labor’s recent messaging about the importance of fairness and the problems posed by rising societal inequality by arguing the data shows Australia does not have a significant problem.

The government has characterised Labor’s suite of policies, which include retaining the deficit levy and applying an increase in the Medicare levy only to workers earning more than $87,000 – policies which have the combined effect of increasing the top personal tax rate to 49.5% – as class warfare, or a “penalty on success”.

The treasurer, Scott Morrison, argued in a speech last week that fairness was about people contributing their fair share, but it was “not about taking from those who have earned to simply even up the score”.

“Bill Shorten only thinks you are doing better if someone else is doing worse,” Morrison said last week.

Shorten used Sunday’s speech to rebut Morrison’s characterisation of his motives. “There is nothing wrong with people earning a good income, or profiting from their investments,” he said. “I don’t begrudge anyone the money they’ve made.

“But our system should not be subsidising those who are already wealthy – and our budget cannot afford to.”