Michelle Rowland (Greenway, Australian Labor Party) Share this | Hansard source

I am very pleased to rise in support of the Tax Laws Amendment (2011 Measures No. 5) Bill 2011, which affirms this government's ongoing delivery of improvements to Australia's taxation regime. These are reforms which have been welcomed across the financial services sector, and a diverse range of interests across our economy stand to benefit from the passage of this bill.

I would like to turn to the key elements of the bill, which comprises five schedules that respectively address the ability for trust beneficiaries to continue using primary production averaging and farm management deposits in a loss year from the 2010-11 income year; provisions which permit capital gains and franked distributions of trusts to be streamed to beneficiaries for tax purposes; technical amendments to the National Rental Affordability Scheme which will provide certainty about the entitlements of parties participating in the scheme; the phasing out of the dependent spouse tax offset; and reform of the statutory formula for determining the taxable value of car fringe benefits and replacing it with a simplified, single rate of 20 per cent, irrespective of the number of kilometres travelled.

Schedules 1 and 2 of the bill in particular deal with the outcomes that ensued as a result of the 2010 decision of the High Court in Bamford v Commissioner of Taxation. And it is these provisions which I will primarily address this evening. I turn first to the nature of trusts themselves. In understanding the relevance of these proposed amendments, it is instructive to firstly consider the nature of trusts and their prevalence in the financial arrangements of many small businesses today, particularly rural interests. It was with much pleasure that, in preparing these comments, I harked back to my well-worn edition of Jacobs' Law of Trusts and refreshed myself on the four essential elements of a trust; namely, the trustee, the trust property, the beneficiary and a personal obligation attached to the property.

As highlighted by Meagher and Gummow from the outset, a trust can be described as 'an institution developed by equity with its own peculiar characteristics'. However, to define the juristic nature of a trust is more complex, and it is often easier to criticise attempts at such a definition and define what it is not rather than what it is. Nevertheless, today trusts are used in many contexts in the Australian landscape. Indeed, our superannuation system is characterised by funds which are structured as trusts and, according to recent APRA statistics, these trusts are responsible for close to $1.4 trillion of money under management.

Trusts are also a common vehicle for small to medium business enterprises. Many family trusts, by definition, rely on trust structures. Family trusts are an example of a discretionary trust. This where the distribution of the trust property is subject to the discretion of the trustee. When one considers that there are in fact hundreds of thousands of trusts in operation in Australia in some form, the magnitude of the implications of the provisions of this bill become clear. As the Australian Taxation Office itself has noted:

Traditionally, the use of trust arrangements was seen as a vehicle largely used by wealthy families and businesses for asset protection purposes and legitimate tax minimisation. In recent times, the use of trusts has become more widespread.

I would like to turn to the implications of the decision in the High Court case of Bamford v Commissioner of Taxation. The response of the Australian Taxation Office is significant and affects every trust in Australia. In essence, it affects how the distribution provisions of those trust deeds need to be drafted to obtain the optimal tax outcomes—subject of course to the anti-avoidance rules in the tax legislation.

Prior to the decision in Bamford v Commissioner of Taxation, the Australian Taxation Office applied Taxation Ruling TR 95/29, which dealt with the applicability of averaging provisions to beneficiaries of trust estates carrying on a business of primary production. The effect was that the ATO regarded a beneficiary as presently entitled to a share of the trust income provided there was some gross trust income and the trustee exercised their discretion in favour of the beneficiary. In cases where there was no gross trust income, the ATO regarded a beneficiary as presently entitled to a share of trust income where they had a vested and indefeasible interest in trust income, and were therefore deemed to be presently entitled to trust income. The practical effect of these provisions meant that a beneficiary could be taken to carry on a primary production business that was actually carried on by the trustee in a year where the trust had a loss for trust law purposes. Thus, such a beneficiary continued to be eligible for income averaging and was not required to have their farm management deposits repaid to them and included in their assessable income.

However, the High Court in Bamford held that a beneficiary cannot be presently entitled to a share of income of a trust if there is no income legally available for distribution. As a consequence, the ATO ruling was incorrect at law and withdrawn. In its decision impact statement on the High Court's ruling, the ATO made several observations including: a number of issues concerning division 6 of the Income Tax Assessment Act remained unresolved; there remained at issue the effect for taxation purposes of a re-characterisation clause that requires or permits the trustee to treat capital that is otherwise received as income—the ATO noted that these were not facts before the court in Bamford; and the income of a trust estate for trust law purposes and its income for tax purposes are two different subject matters which do not necessarily correspond.

I would like to turn to the process of reform, which has led to this bill before the House today. Clearly, these developments have necessitated legislative action on trust tax law—an issue which the Assistant Treasurer rightly identified as an ongoing area of concern, where reform is necessary to simplify the system, rewrite some rules and provide more certainty to the tens of thousands of small businesses and farmers who utilise trusts. With this in mind the Assistant Treasurer announced in December last year a public consultation process with a view to seeking input from industry, individuals and peak organisations and to updating the trust income tax provisions of the Income Tax Assessment Act.

It is a reflection of this government's consultative approach that the Assistant Treasurer's announcement emphasised the role of private sector expertise in the development of its consultation paper. As the Assistant Treasurer further noted:

Any options will seek to ensure that net taxable income of a trust is assessed primarily to beneficiaries. Trustees will continue to be assessed only to the extent that amounts of net taxable income are not otherwise assessable to beneficiaries. The options will not include the taxation of trusts as companies, which would be a major departure from the current law.

In March this year the Assistant Treasurer released the discussion paper, 'Improving the taxation of trust income', and in his speech to the national convention of the Taxation Institute of Australia he announced the adoption of two recommendations to clarify the tax law for over 600,000 trusts in Australia. The two key recommendations from the Board of Taxation addressing those key areas of uncertainty for trusts were the better alignment of the concept of 'income of the trust estate' with 'net income of the trust estate'. This is indeed an area of challenge, which was noted in the consultation process, and the concerns in this area were taken on board in the legislative drafting process and the enabling of the streaming of capital gains and franked distributions. Again, the rationale for the implementation of the Board of Taxation recommendations was to enable the large number of businesses and individuals using trusts to continue to do so with confidence and greater certainty. The consultation process received thoughtful input from a range of reputable industry and interest groups including the Financial Services Council and the Law Council of Australia.

In April a further public consultation process was announced for the exposure draft legislation to give effect to these important reforms. As can be clearly seen the process undertaken to arrive at this point has been thorough, transparent and based on invaluable industry and private sector knowledge. Importantly, the amendments contained in schedule 1 of the bill were rightly described by the Assistant Treasurer as very welcome news for approximately 23,000 Australian farmers with trusts, with these amendments introduced to the House before 30 June as promised, so that beneficiaries can continue to use the primary production averaging and farm management deposit provisions in a loss year.

I will conclude with some comments on the dependent spouse tax offset in schedule 4 of the bill, which amends the Income Tax Assessment Act to implement the budget measure of phasing out the dependent spouse tax offset. This reform will mean that, from 1 July, taxpayers with a dependent spouse born on or after 1 July 1971—a great year may I say—will no longer be eligible for the dependent spouse tax offset. This means the DSTO will be gradually phased out as the population ages.

It is important to understand the nature of the dependent spouse tax offset. This government is focused on removing disincentives for people to remain out of the workforce, including younger dependent spouses without children. It is quite obvious that the dependent spouse tax offset is an outdated measure that reflects old-fashioned gender roles. In fact, it has been around since the inception of the Income Tax Assessment Act in 1936.

As well as modernising our tax and transfer system, schedule 4 of the bill reflects this government's focus on encouraging workplace participation—something we all know we urgently needed in our skills-short economy. On this point the bill recognises the unique circumstances that do affect some people in our community who would otherwise be caught by this change. Consequently, Australian taxpayers where the dependent spouse is a carer, who is an invalid or permanently unable to work, and taxpayers eligible for such measures as the overseas civilian tax offsets will not be affected by this change.

In addition families with a dependent spouse and young children are not affected by this measure because they would receive family tax benefit part B and would be ineligible in any event to receive the dependent spouse tax offset. This reform recognises that a bigger workforce is vital for the strength of our economy and the living standards of our community. I commend the bill to the House.

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