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Tuesday, 8 June 1999
Page: 6286

Mr BAIRD (4:09 PM) —I rise to support the A New Tax System (Closely Held Trusts) Bill 1999 and cognate bills. I note that the shadow minister has indicated that the opposition will be supporting the bill as well, and so it should. The reform of the trusts legislation is an important part of the overall reform of the taxation system. I would certainly congratulate both the Prime Minister and the Treasurer on their far-reaching reforms of the overall tax system—the most significant tax reforms we have seen since Federation and certainly the most significant we have seen in this chamber. Through this legislation, the government intends to eliminate the unfair advantages for those who use this particular type of tax approach, while at the same time respecting the role of trusts as well-used vehicles for asset protection and holdings by farmers, small business and others in the community.

In the public debate, trusts have been characterised by the Labor Party as being a mechanism for the very rich. The reality is that they are widely used by small business and professionals as well as investors in listed property trusts. Likewise, there are many legitimate reasons why closely held trusts should be used and why they contain multiple trusts. It is clear, however, that there has been a significant growth in the number of trusts and that a certain number of these trusts and that multiple trusts are being used to give individuals an unfair tax advantage or to make it difficult for the Australian Taxation Office to piece together the trail of distributions.

In 1996-97 there were 427,431 trusts lodged in Australia, up from 331,000 in 1993-94. The number of companies has also increased over this period but not at the same rate. The Australian Taxation Office has stated that the relative rates of growth of trusts and companies could reflect the different tax treatment of both trusts and companies. The Australian Taxation Office has commented on the use of trusts as follows:

The preference for a discretionary trust over a company structure or vice versa is dependent upon a range of factors including establishment and operating costs, the taxation treatment of income from companies compared with income from discretionary trusts, the capital gains tax treatment of shares compared with interest in a discretionary trust, and the relative level of the company tax rate.

Along with the measures contained in this bill, the government has also brought changes to ensure that trusts are taxed in the same way as companies in many regards. That is a fairly logical, sensible approach to this whole process of tax reform, which of course is symbolic of the whole reform of the tax system and the GST system itself.

According to the Australian Taxation Office figures, discretionary trusts have grown by some 30 per cent in the last decade. The main reason behind this growth in popularity is that they are effective tax shelters. Trusts distribute all income and realised capital gains tax free. Tax is paid by the beneficiaries at normal income tax rates. Trustees have complete discretion as to how income tax and gains are distributed.

The current taxation laws in respect of returns and assessments have certain deficiencies, including where the net income of a trust estate is passed through a series of trusts without any ultimate beneficiary having been named or assessed on that net income either because there is no ultimate beneficiary or because the ultimate beneficiary cannot be identified. A trust deed may, for example, describe a class of persons from which the trustee may select to distribute trust moneys. There may not, however, at a particular point in time, be any persons who fall within the described class. In this situation, there will not be any ultimate beneficiary.

The government's new tax system is about fairness and ensuring people pay their fair share. The government wishes to see that wealthy individuals and businesses which are normally in a position to avoid paying their fair share of tax are less able to do so. I think all members of this House would agree with that proposal. The estimated revenue gains expected through this measure alone will amount to some $30 million in each of the 1999-2000 and 2000-01 years. This money will lessen the burden of the average taxpayer and will find its way through consolidated revenue to social programs and paying off Commonwealth debt. While the ALP clearly does not place the same importance on paying off national debt, it nevertheless recognises the abuse that exists in the trust system. Reform of the trusts legislation was a major part of the Labor pre-election tax package.

Taxation Office computers have discovered a rort known as a circular trust program, thought to have died out in the 1970s. In one technique known as `substituted reporting dates', some trusts have shuffled income from one trust to another and then back again. The Taxation Office has said that there is evidence that some taxpayers are using complex chains to make it difficult for the tax office to piece together the trail of distributions from trust to trust to establish liability. Mr Gil Levy, a partner at Arthur Andersen, said that he suspected that some trusts have been swamping the system with so many returns that no-one really knew whether tax was being collected along the way or not.

The three bills before us deal with these issues. They propose measures that are generally very well targeted, and it is reasonable to expect only opposition from tax avoiders and their financial advisers because of their vested interests and from the opposition. In this case, we know that the opposition will be supporting us.

Taxpayers and ordinary Australians stand to make significant gains. Firstly, the aim of the A New Tax System (Closely Held Trusts) Bill 1999 is to correct deficiencies in the existing law and will require the trustee of a closely held trust to provide the Commissioner of Taxation with the tax file numbers of the ultimate beneficiaries of certain net income and tax preferred amounts distributed from trusts. This will apply where the immediate distribution is made by one trust to another trust—for example, where a chain of trusts is involved. Secondly, where there is no such disclosure, the A New Tax System (Ultimate Beneficiary Non-disclosure Tax) Bill (No. 1) 1999 imposes tax on the part of the net income at the top marginal rate plus the Medicare levy. The non-disclosure of tax preferred amounts produces offences under the Tax Administration Act 1953. Thirdly, where there is no ultimate beneficiary, the A New Tax System (Ultimate Beneficiary Non-disclosure Tax) Bill (No. 2) 1999 imposes a tax on part of the net income at the top marginal rate plus the Medicare levy plus the penalties for not doing so.

The two main concerns with this bill cover the liability of trust directors and the burden of these measures on all discretionary trusts. Both are unfounded. The first question is in regard to the liability of trust directors. Not surprisingly, there have been some negative reactions to this. We found comments in the Financial Review about this. In an article appearing in the Financial Review on 26 May 1999, solicitor Robert Richards claimed that this legislation `does not protect a director who in good faith tries to do the right thing'. It is necessary to point out that, under section 102UL, which relates to ultimate liability, directors are specifically excluded from liability if, because of illness or other good reason, they did not take part in the decision to make a correct ultimate beneficiary statement; they did not take part in a decision not to make a correct ultimate beneficiary statement; they were aware of a decision not to make a correct statement but took reasonable steps to prevent the making of that decision; or they voted against the majority decision not to make a correct ultimate beneficiary statement.

The let-outs given to directors are exhaustive and cover all the legitimate reasons for an individual director being held liable. Secondly, the inclusion of a discretionary trust in the definition of a closely held trust is claimed to spread the compliance burden too far. The definition of a closely held trust is also criticised by tax avoidance advisers, who stand to lose another loophole. Their complaint mainly centres on the fact that a closely held trust includes trusts where up to 20 individuals are entitled to a 75 per cent or greater share of income of capital of the trust or a discretionary trust, and discretionary trusts themselves. There is an unfounded fear that this measure will force some 60,000 trusts to engage in more paperwork. It is seen incorrectly as a penalty compliance burden imposed on many to control cheating by a few.

These proposals do not go beyond the original intention, however. The only trusts that can be affected are those which are closely held and have other trusts as beneficiaries. All discretionary trusts are treated as closely held trusts for the purpose of the proposal, but most will not have any trusts as beneficiaries and therefore will never be affected. The only trustees that will find these measures burdensome are those who operate complex trust chains. It will not be known how many trusts are set up as part of complex structures until these measures are implemented. The government has specifically excluded a number of types of trusts from this measure. These include complying superannuation funds, deceased estates, and fixed and Stock Exchange listed unit trusts.

We see from the proposals under these three new bills that there are some changes that will be beneficial to the tax system and will yield additional revenue of the order of $30 million in the next two financial years. It will close many of the loopholes where the ultimate beneficiary is not spelled out or the circuitous route is so complex that, from the way in which the whole trust is set up, it is not clear which person is ultimately respon sible. The purpose of these bills is to get to those particular individuals or to those trusts which are simply aimed at avoiding legitimate tax. There is no doubt that many of these trusts are used for entirely legitimate reasons. They are used by small business and they are used by farmers, but there are those who simply use them to avoid paying their fair share of tax. I am sure that all members of this House would want the government to retrieve income tax where it is legitimately due and these three bills will do much to address this in relation to trusts. I commend the bill to the House.