David Bushby (Tasmania, Liberal Party) Share this | Hansard source

I rise to speak on the Tax Laws Amendment (2008 Measures No. 4) Bill 2008, a bill which combines a number of unrelated matters, some of which make good sense and others which represent very poor policy and which are hard to justify other than on a shameful, ideological and outdated approach to class envy, the rural sector and small business that I thought had long since passed.

The bill is effectively split into three parts, set out as three schedules. Schedule 1 deals with the taxation treatment of demutualisation of private health insurers. This measure will clarify the capital gains taxation liability private health insurance policyholders attract when their insurer demutualises and makes it clear that such a process does not create such a taxation liability. In the interests of transparency, I mention here that my family and I, like many Australians, are policyholders with MBF, which has just gone through the demutualisation process.

As I understand it, there was never any intention that such a process of private insurer demutualisation would create any capital gains tax liability. But the legislation is not entirely clear in this respect. Schedule 1 is intended to clarify this situation and make it absolutely clear that the receipt of shares or funds in a demutualising private health insurer does not attract any capital gains tax liability. In respect of the merger of MBF with BUPA on 16 June 2008 and the resulting demutualisation, a cash payment for the disposal of certain membership rights was made to policyholders on 30 June 2008. The Australian tax office’s website has noted that in the financial year just ending it will accept returns assuming no capital gains tax liability pending the outcome of this bill. This measure is sensible and removes an uncertainty that has the potential to affect many Australians right across the nation and should be supported.

Schedule 2, however, is another matter altogether. This schedule amends schedule 2F of the Income Tax Assessment Act 1936 and hence the family trust election rules, or the FTE rules. It essentially has two main effects: first, to place limitations on who is included under the definition of lineal descendants of the test individual or the test individual spouse; and, second, to remove the ability for a family trust to make a one-off variation of the test individual specified in a family trust election. These two measures reverse changes made by the previous government just last year to simplify the administration burdens on family trusts and to address a number of problems that had become apparent with the then-existing longstanding FTE rules. At the time these amendments were put through—and again I stress it was just last year—the then Labor opposition opposed them. Given the proven need for the 2007 changes and the absolute lack of justification for opposing them, I can only conclude that their opposition to the amendments was based more on some outmoded notion of class warfare and the politics of envy than on any semblance of logic or reason. It seems to me that they saw the coalition government making changes to the laws relating to the taxation of family trusts, so, by definition, that government must have been looking after its rich mates by giving them more tax breaks.

Of course, as we know on this side of the chamber, the reality is quite different. The FTE rules, first introduced in the 1990s, were made to curb what was considered an abuse of the family trust vehicle to evade tax that would properly have otherwise been payable. They limited the ability of trusts to manipulate the class of beneficiaries that could make use of the taxation benefits available to trusts. They also introduced the requirement to nominate a test individual whose family relationships would determine the class of persons eligible to benefit under a family trust. However, what was not foreseen at the time was that these changes would have unforeseen long-term consequences, many of which were not apparent until some time had passed and the reality of changes in family circumstances and dynamics and trends to smaller families threw light on the problems.

One of these was that by limiting the class of lineal descendants to just grandchildren and children of siblings of a test individual, it was entirely possible that a family trust could find itself without beneficiaries that met the definition and have no ability to change the test individual to introduce a new set of beneficiaries, with a consequent need for the trust to be prematurely wound up. ‘So what?’ you might ask. This problem has real consequences for the hundreds of thousands of farms and small businesses across Australia operating through family trusts. It could mean that a business operating through such a trust is forced to wind up its trust and pay a 46.5 per cent family trust distribution tax. In the view of CPA Australia, as expressed in their written submission to the Senate inquiry:

… [this] limitation effectively amounts to a de facto inheritance tax, adds significant complexity to the tax law and is wholly inconsistent with trust law, commercial practice and the objective of reducing the compliance burden on taxpayers.

As already apparent, the proposed changes also fly directly in the face of the strongest advice from all the relevant professional organisations, as contained in their written submissions and as presented at the hearing. For example, the Taxation Institute of Australia stated in their written submission to the inquiry:

As the 2007 amendments were specifically targeted to overcome a number of acknowledged problems with the operation of the FTE rules and reduce the onerous associated compliance costs, we continue to struggle with the need to reverse these amendments. Not only will this rollback impact unfairly on taxpayers, it is also difficult to see how the amendments will result in any significant revenue savings.

And the Institute of Chartered Accountants in Australia noted in their written submission to the inquiry:

These two measures now being reversed in the Bill formed part of a package of important amendments to increase flexibility for family trusts by the previous government following inter alia a detailed submission by the Institute in November 2004 identifying shortcomings of Schedule 2F to the Income Tax Assessment Act 1936.

As stated therein:

‘The definition of “family” only extends down two generations. We don’t perceive any policy rationale for placing a generational limit on the definition of family especially given that the typical life of a trust is 80 years, which means they commonly extend into a fourth generation. This means that many family trusts will eventually have to distribute outside the family group and such distributions will be subject to FTDT.’

And the CPA again:

It is difficult to see a policy justification for placing a generational limit on trusts that have made a FTE. Most trusts typically have a life span of 80 years, which will commonly span four generations. In our view there is no compelling reason why two generations should be sliced off the normal lifespan of a trust.

In a media release on 13 May 2008, the Minister for Competition Policy and Consumer Affairs, the Hon. Chris Bowen, indicated that the measures will ‘improve the integrity of the tax system and achieve cost savings to help fund more urgent priorities’. The explanatory memoranda also noted the measure was a savings measure. This is stated as the government’s justification for reintroducing problems that were, prior to 2007, so evidently in need of reform and of such serious potential impact to over 400,000 small businesses and rural enterprises operating across Australia through family trusts.

At the hearing, this motivation was confirmed by Mr Cicchini of Treasury. He said:

When this measure was announced by the current government, it was announced as a savings measure.

Treasury officials then went on to provide an analysis of what they estimated the savings would be and the analysis of their calculations. This was, at best, vague and unworthy of the good work Treasury usually produces in these matters. They indicated that over the forward estimates a total amount of $20 million would be saved as a result of the measures—$1 million for the first year, $6 million for each year thereafter and presumably this would rise to $7 million in the last year to give them the $20 million. However, the officials had great difficulty in explaining the rationale behind this figure. The best they could do was, when Mr Brown from Treasury noted that the original 2007 amendments containing a suite of measures was calculated to cost $8 million a year, and that the costing of the savings to arise from this measure was based on a reversal of those earlier measures, taking into account that not all of them were reversed. As such, it was clear that no actual modelling or detailed analysis was made to calculate the revenue effects of these proposed changes. There was just a back of the envelope guesstimate based on ‘something less than the figure we had last year’. Mr Brown even conceded that the costings:

...are very indicative. There is not a lot of data on which to base this assessment.

The situation was even worse in respect of separating out the potential revenue benefits arising only from the changes to the lineal descendants. Mr Brown stated that his recollection is that:

... the costing of this is that the lineal descendants, over the forward estimates period, is a very small part, probably around $1 million.

Credible evidence from other witnesses suggested this to be overstated. Given that the Treasury officials admitted their costings were indicative and based on very little information, it is very easy to conclude on the evidence that the savings benefit for the Commonwealth out of the lineal descendants measure will be minimal—certainly in the short to medium term.

When Treasury officials were asked why the government would proceed if there were good reasons for making the changes in 2007 and minimal benefits to Commonwealth revenue arising out of the measures, no attempt was made to defend the measures or deny the allegation of minimal revenue benefits. Mr Cicchini commented:

We are simply implementing the government’s desire and its pre-election commitment. It announced it as a savings measure. So we are not passing judgement on its worth as a measure ...

Mr Cicchini’s evidence at the hearing also shed some light on the overall thinking behind schedule 2F of the Income Tax Assessment Act. He stated:

The trust loss rules in schedule 2F of the Income Tax Assessment Act 1936 are primarily there to prevent the tax benefits arising from the recruitment of trust losses being passed to beneficiaries that did not bear the economic loss or the bad debt when it was incurred.

This is fair enough and a widely accepted principle. I have no problems with that. However, and this is important, Mr Cicchini then went on to note that the FTE rules provide a special concession to family trusts—that is, there was a deliberate policy decision to allow family trusts, which make an election and specify a test individual, to carry forward losses and utilise them without meeting the other rules provided that such a trust only distributes to members or members within the family group. This special concession was a reflection of the nature and importance of family trusts as the owners of small businesses and farms across Australia and the desirability of, effectively, treating the family operating them as a single entity for the purpose of these rules.

It is a principle that Mr Cicchini clearly acknowledged. The 2007 amendments did not change this principle. They did not say, ‘Hey, lets take the principle and extend it to others outside what would in the normal course of events be considered a family group’ or extend it in any other way. No, all they did—so far as they applied to these two measures we are considering today—was acknowledge that if this principle is to be applied in a manner that delivers the outcomes the special concession is intended to deliver, there needed to be some amendment to the election rules and to who can be included in the family group. It is simple really: if you support the principle that family trusts should receive the benefit of this special concession, which the government appears to do, it makes sense that you ensure the rules allow that special concession to work properly. But here we have the government winding back sensible changes that did just that and seeking to return to a situation where the value of providing this special concession is severely undermined.

In examining the issue this way, I start to wonder whether this government is supportive of the special concession granted to family trusts in this respect or whether an ideological bias and prejudice against family trusts is behind the change. In his initial announcements, the Treasurer referred to the general principle that those who receive the tax benefits of losses should be those who incurred them, as justification for the two changes in schedule 2 that we are discussing in the context of this bill.

Other government members of the other place also refer to this principle. For example, the member for Lindsay, in his second reading speech on this bill on 28 August just gone, spoke for the two changes in schedule 2 of this bill because:

... it is a different proposition to start providing for transfers of those losses to others that might not have borne the real economic loss. Where that is done we start to get into some of the avoidance issues that emerge right across the tax system.

And later in the same speech:

The essential point that he is making there is the point I was making earlier. Where a loss is incurred, the value of that loss should only be available to the individual or the entity that incurred the true economic cost of that loss.

This is a restatement of the general principle but, clearly, the member for Lindsay was unaware of the special concession allowing just such a transfer in the case of family trusts. And if he was unaware of that concession, he, by definition, could not possibly have comprehended the need to refine the very rules that set out how that concession is applied in practice. Hence his argument, which appeared to me to be predicated entirely on the principle behind that quote from his second reading speech, must fail. Similarly, any other attempt to justify the changes contained in schedule 2 of this bill, on the basis of the general principle that does not acknowledge and specifically address the special concession granted to family trusts, must also fail.

The evidence received as part of the inquiry of the Senate Standing Committee on Economics into this bill suggests that modern family trusts are used primarily not as tax minimisation strategies but to provide for one’s current and future family, especially as part of personal estate planning. As discretionary trusts are one of the major ownership vehicles in family assets, especially rural land, if these measures are passed all current ownership structures will have to be reviewed. For the discerning minority, non-real property asset structures will be moved overseas. For the majority of trusts however they will for no apparent reason have the tax nature of their asset changed. The changes proposed in schedule 2 of this bill are bad policy and should be opposed.