The Australian Council of Social Service (ACOSS) has called for the tax treatment of private trusts to be tightened, which it says could save $1.5 billion in 2017-18.
In its pre-budget submission ACOSS says private trusts, with some exceptions, should be taxed as companies to deal with the problem of their being used to avoid personal income tax.
There has been so far little discussion of trusts, always a sensitive issue in the Coalition, in the current tax debate.
The ACOSS submission says that private trusts can be used to avoid income tax by splitting income with a family member, delaying or avoiding payment of capital gains tax, and by passing on the benefits of investment tax breaks to the trust’s beneficiaries.
These trusts “are often used to evade tax by making transfers of assets or income more difficult to trace”, ACOSS says.
It points out that private trusts are much more widely used these days both for investment and active business purposes. Over the decade to 2012, their number grew from 470,000 to 713,000. “A major reason for this is their use to avoid income tax”.
While ACOSS urges taxing private trusts as companies to attack avoidance, one consequence would be to enable high income earners to exploit the gap between the company rate and the higher personal income tax rates by retaining income in the company.
That weakness in the tax treatment of private companies would have to be dealt with, ACOSS says.
“The use of ‘cashbox companies’ to avoid personal income tax by retaining income in a private company should be curbed by taxing retained earnings (minus a reinvestment allowance) in private companies at the top marginal tax plus Medicare levy”. This would save an estimated $1 billion in 2017-18.
The wide-ranging ACOSS submission, which contains a plethora of recommendations for both spending and savings, argues that the case for tax reform is “compelling”. It should be structural and grow the revenue base “fairly, steadily and efficiently”. “It must focus on major tax concessions which have unintended or inequitable impacts including superannuation and housing investment concessions.”
On negative gearing, the current tax issue of hot debate, the submission says its tax benefits are “heavily skewed, providing ten and a half times the benefits to the top 20% of households (around $3800 a year) than they do to the lowest 20% (around $364 a year).
"Moreover, over 90% of investment in negatively geared housing stock applies to existing properties, thereby inflating housing costs and fuelling speculative booms in the housing market.”
ACOSS recommends that deductions for expenses for passive investments in housing, shares, collectables and similar assets purchased after January 1 2017 should be confined to offset income received from those assets, including capital gains on their subsequent sale.
It says part of the revenue saved from the change should be used to introduce a more effective incentive for new investment in rental housing.