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Wednesday, 3 September 2008
Page: 4359

Senator JOYCE (9:53 AM) —I just want to quickly cover a couple of the issues that have been pointed out by previous speakers. Schedule 1 deals with demutualisation and basically confers an expansion of the term of the demutualisation so that what we have today is an expanded concept of the exemption that is currently in place under division 9AA of schedule 2H of the Income Tax Assessment Act 1936. What we really have in the first one is an expansion of the term to encompass the progression of demutualisation to the definitions we have now and the new nuances that appear in that type of entity structure. So it really keeps to the intent of the original legislation and, as such, there is no real reason to oppose it.

Schedule 3—I will not bore the people listening to this over the radio—is just a matter of technical amendments and of no real consequence. At this point in time they can be perceived as being of no great consequence and, as part of the general housekeeping of events, should also be supported.

Schedule 2, however, is a completely different kettle of fish. Schedule 2, once more, is a stalking horse return by the Labor government to try to get back towards entity taxation laws. Entity taxation laws ignore the fundamental aspect and structure of trusts. Entity taxation laws of course would make trusts no longer viable. In short, they would make a trust, as an entity, no more applicable than a company and of course people would move to companies.

In the Australian community, however, for over a hundred years trusts have been an extremely viable and appropriate mechanism especially for the protection of assets. More and more today it is the case that when people own an asset they do not own it for their own exploitation, for their own benefit; they hold it in perpetuity for those who come after them. This is an extremely important concept to understand. People who generally use the asset protection mechanism of trusts, especially discretionary family trusts, are doing so in order to protect the lineal descendants of their family from the divesting of their asset. This could happen in a number of ways—through marriage break-up and a whole range of other things.

It is especially applicable to people on the land. Growing up on the land myself, I know that the property is always seen as somewhere where you work and which you have the benefit of whilst you are alive. But there is always the strong expectation that it is an asset that you will hand on to those who come after you. There is not the expectation that you will be selling it up and divvying it out almost exclusively to yourself. There is always a sense in the ownership of land that you will work very hard, you will get what you can out of it, and then you will hand it on to the next generation. That is why schedule 2 starts to raise the spectre of going into that and attacking it.

The way that schedule 2 attacks that notion is quite clear. It attacks it by changing the ability of the test individual to be changed. The coalition allows a one-off change to the test individual—that will now be scrapped. The next thing of course is the change in the definition of ‘family’. Under this piece of legislation ‘family’ will be the sons, daughters, grandsons and granddaughters of the test individual—those levels for whom the test individual is the direct progenitor—or the nephews and nieces—those one level removed from the test individual.

This of course starts to really come in and creates a capital gains tax event horizon in the foreseeable future of this trust. And this is what is dangerous about it. What does that exactly mean? Of course, at the end of a trust it will either vest, which means the distribution of the assets, or you will be up for a penalty tax. A penalty tax with the Medicare levy is, I think, 46.5 per cent. So that is why schedule 2 needs to be knocked out. To use an analogy: if you are on the farm you do not want to be forced into a position where you are selling the farm, because there is no intention to sell the farm. The farm is to go on in perpetuity. I believe there is strong merit in knocking out schedule 2.

Even if you look at the fiscal side of this, as has already been pointed out, in the immediate term the so-called fiscal gain is almost obscured. I think it is $1 million in 2008-09, $6 million in 2009-10, $6 million in 2010-11 and $6 million in 2011-12. In the whole scope of things in an economy in excess of a trillion dollars that is not much of a win. In fact the administration of it, I would suggest, is going to far outweigh any benefits from it.

There is between 400,000 and 500,000 trusts in Australia. So there will be a huge boom for accountants—and I am one of them so I will declare my interest—and solicitors, as people trot back into the office to reorganise the structure of their affairs. And with the reorganisation of the structure of their affairs there are stamp duty implications, capital gains tax implications and a range of implications that then become part of the process. More importantly, a huge amount of fees will be paid to accountants and solicitors as things get reorganised.

If the intent is to raise revenue or to close a loophole or to do whatever they decide today, then I can suggest to them umpteen other far greater loopholes that they might want to think about closing, such as the one that the Labor Party supported where non-real property assets from foreign entities are capital gains tax exempt. If an Australian buys and sells a hotel they pay capital gains tax but if they are living in New York they do not pay any capital gains tax in Australia. That is worth, I would say, hundreds and hundreds of millions of dollars as a loophole. But that has not been closed. Are you going to concentrate on and attack, once more, a structure that has been used for very good reason over a long period of time to protect the nature, custom and practice of the delivery of an asset through generations?

I do not think the Labor Party is being completely up front because the only purpose of this is as a stalking horse to their overwhelming desire to—

Senator Xenophon —A Trojan Horse.

Senator JOYCE —Of course, it would be a Trojan Horse from Mary of Troy or—

Senator Xenophon —Helen!

Senator JOYCE —Helen of Troy, Mary’s sister. That is a confusion; it is obviously the Irish in me today! We now have Mary of Troy—it might be to do with our notice of motion later on. It is the Trojan Horse for a greater desire to move towards entity taxation at a later stage.

There will be people driving off the road in boredom as they listen to this but it is important. In subsection 272-80(5B) of schedule 2F, item 2 of schedule 2 will be repealed. This is to do with the test individual. The test individual is the person who the trust is associated with—who is the determinant of the trust. In the past, for a very good reason you could have a one-off change. That has predominantly been knocked out. That can cause a huge problem when the test individual dies. It could be through an accident—and I am thinking of one specifically—such as a plane accident. This can have unnecessary ramifications on the holding of that asset. So on a technical basis it is bad legislation because it does not take into account the unforeseen ramifications that could well come about in so many of these areas. Trusts are an overwhelmingly widely used vehicle.

The other thing about the change in the test individual is that, because we have already made the change and people have already structured themselves into this change, it becomes slightly retrospective in its effect and in how it is dealt with. That is always a bad precursor to any piece of tax legislation. It is a real pain in the neck when the government starts retrospectively changing tax laws, because you have to pull out all your files of your client base and start going back through them all to see what advice you have given, what structure you have put them into and what changes therefore need to be brought about. Not only is it retrospective but, because of your diligence to your client base, it causes you to have to go through everyone—every file—to find out what the ramifications are. People do not like being pulled into the office and being charged a fee, not because of anything you deliver but because of a change the government has made. It becomes completely nauseating when you tell them that in the prospective window of revenue for the government we are looking at approximately, at best—their own figures—$19 million over four years. That is hardly a reason to change the legislation unless you have another idea sitting behind what you are doing.

Using the government’s figures, if we manage to exclude schedule 2, what is the government losing? It is losing nothing; in fact, it will probably save revenue. The administration of it, I suggest, will be far in excess of the revenue it gains. What is its effect on the Australian people? If we knock out schedule 2 we remain with the status quo which gives some certainty to the family trust structure, which is the owner of the assets. If we knock out schedule 2, what else do we do? We maintain a position that has been held in this nation for a long period of time and we will not be moving towards entity taxation rules. If we progress towards entity taxation rules, and this is the first step towards it, we are only fooling ourselves. If a little old bush accountant from St George can suggest how you can get out of tax by just restructuring your affairs through a trust based overseas, where they do have them, then I am sure that far smarter people than me will be doing exactly the same thing. All we are doing is creating a schism where the discerning and those who are willing to pay more will, once you get diminution in the effect of trusts, start to move the controlling mechanisms of their assets overseas. Only those who cannot afford that advice and that restructuring will keep those mechanisms here. I would suggest that, because of our changes to capital gains tax exemption for nominal property assets, which would include choses in action, that is happening right now. In fact I cannot think of any reason why we would have passed that piece of legislation before except on the prompting of certain exceptionally well-connected lobbyists who managed to get the support of both sides of the House on that issue.

Why would we go down this path, which is an attack on the general ownership structure of Australian assets held by Australians, and then put up the idea that the reason is to maintain revenue, whilst in the same breath have a hole in it that you could drive a Mack truck through because of the flow of funds out of our Treasury coffers overseas by reasons of capital gains taxation exemption on nominal property assets? We must look after the structure that is inherent in Australia at the moment—that is, the trust structure. This bill, in its initial form, is an attack on the structure of so many assets, especially rural assets held by people in regional areas. When we decide to move away from this, we move away from the inherent belief—and I think it is a noble and correct belief—that the idea of a trust is that something is held for you in trust; it is not yours. You are the beneficiary of the asset, but it is not yours to dispose of; it is for you to hand on. The custom and the practice is that you hand on that asset. I think that is also, in the psyche of the nation, a noble attitude for people to have. Even on a philosophical level, I would hate to see a movement away from trusts because it is a movement away from an idea that you do not just live for yourself; you live for those who come after you.