Helen Coonan (NSW, Liberal Party, Shadow Minister for Human Services) Share this | Link to this | Hansard source

I am addressing these remarks in respect of the Tax Laws Amendment (2008 Measures No. 4) Bill 2008 and I have to inform the Senate that the coalition will be supporting schedules 1 and 3. This bill has three schedules. Schedule 1 amends the Income Tax Assessment Act 1936 to exempt private health insurance holders from capital gains tax if they receive shares or cash when their not-for-profit insurer demutualises to a for-profit insurer. Schedule 2 amends the Income Tax Assessment Act 1936 to limit the definition of family by changing lineal descendants to children or grandchildren of the test individual or the test individual’s spouse. Schedule 2 limits the ability for family trusts to make a variation to the test individual except in the case of marriage breakdown. Schedule 3 makes a variety of minor amendments to taxation law to remove minor errors including incorrect terminology and typographical errors—it is a clean-up schedule. The coalition, as I said, supports 1 and 3. However, we do not support schedule 2, but I will deal in a little more detail with schedules 1 and 3 first.

Schedule 1 is a specific response to the demutualisation of NIB last year and of MBF this year. The object of this schedule is to provide capital gains tax relief for private health insurance policyholders who receive a cash payment when their insurer demutualises. When an insurer demutualises, the accumulated surplus from the fund is distributed to existing members of that fund, and policyholders receive a share of the profit. When this happens, though, the recipients of this profit are subject to capital gains tax. Schedule 1 is a very sensible measure because it exempts the recipients from capital gains tax. This is entirely appropriate as those people who have invested in their own health cover should not be slugged with additional capital gains tax. Unlike the Labor government, which seems intent on dismantling private health insurance, we in the coalition actually support people who have private health cover and the private health insurance industry more generally, and thus we are pleased to support this schedule.

Schedule 3 of this bill is, as I said, a non-controversial administrative measure. It makes relatively straightforward and minor changes to existing tax laws to promote their intended operation and clarification and it does have the coalition’s support. We are, however, opposed to schedule 2 of this legislation as, in our very firm view, it is a regressive step in tax law that does not have either community or industry support. I foreshadow that I intend to move an amendment during the Committee of the Whole to excise schedule 2 of this bill so that the Senate will be able to quickly pass schedules 1 and 3 whilst also having the opportunity to consider the merits of schedule 2 in a separate measure at a later stage.

Schedule 2 to this bill amends schedule 2F to the Income Tax Assessment Act 1936. Schedule 2F of the act deals with trust loss measures. Basically, the trust loss measures prevent the transfer of tax benefits on the recoupment of a trust’s tax losses to persons who did not bear the economic loss when it was incurred. Family trusts are considered as accepted trusts for the purpose of the trust loss rules and measures in schedule 2F. To be eligible to be a family trust, the trustee must make a family trust election in respect of an individual—the so-called test individual. When a family trust election is made, distributions can be made to the family group without penalty tax, which is currently imposed at the top marginal tax rate of 46.5 per cent.

The object of this schedule is to limit the definition of lineal descendants of the test individual or of the test individual’s spouse and remove the ability for a family trust to make a one-off variation to the test individual specified in a family trust election. This measure seeks to reverse the changes made last year by the former coalition government. The amendments made by the coalition government reduced the restrictions and compliance burdens placed on small business, farmers and professionals who use family trusts for legitimate purposes, including asset protection and business succession planning.

Last year the changes received widespread support within the community, although they were opposed by Labor, who it seems retain some sort of ideological objection to family trusts. By seeking to reverse the coalition’s amendments the government will substantially increase the compliance burden on all those small businesses, farmers and professionals who use family trusts for legitimate purposes. The coalition notes that the increased compliance burden that these people will have to bear is very much the unintended but inevitable consequence of this schedule. It is because of the increased compliance burden, for apparently little gain to the revenue, that the coalition opposes the changes to the definitions of ‘family’ and ‘lineal descendants’ in a family trust.

We have to ask why the Labor government is making this regressive decision even though it clearly does not have community or industry support to do so. The Labor government is addicted to raising taxes and Labor does have, as I mentioned, an ideological objection to the concept of a family trust. If you want proof of this you only need to look at the Assistant Treasurer’s second reading speech. On 26 June the Assistant Treasurer made a most extraordinary claim about why the government was pushing ahead with the restriction of the definition of ‘family’ in the family trust election rules. In the other place, the Assistant Treasurer said that the purpose of schedule 2 was to reduce the scope for family trusts to be used to lower income tax. You did hear correctly—the purpose of this schedule according to the Assistant Treasurer is to stop families legally and legitimately lowering their tax burden.

You really have to wonder then what motivates the Labor government. Their ideological opposition to lower taxes and family friendly policies is just astonishing in my view. We have a government that wants to restrict families from lowering their tax burden. What happened to the phrase ‘working families’? Now that the election has passed it seems that the government wants to distance itself from working families and from the mantra of economic conservatism. Raising taxes on Australian families is not economic conservatism and nor is it helpful for families who arrange their affairs through a family trust. It is mean spirited and ill conceived and simply distorts the tax system.

We now know from the Senate inquiry that the expected savings from the change to lineal descendants will be around $1 million a year. You have to ask yourself if a saving of $1 million is, or could be, worth all the extra compliance, red tape costs and confusion that are associated with yet another change in this measure. The government talks constantly of motherhood statements like ‘the need to cut red tape’. But obviously they do not really believe in it because if they did they would not be putting this measure forward in this form. The compliance burden, as heard by the Senate inquiry, will, of course, only see money flow into the pockets of advisers and professionals such as accountants and lawyers. You have to ask: what is the point then of this legislation if it will be almost revenue neutral but will punish some families for no broader public benefit? The old saying about Labor’s commitment to cutting red tape, I think, has to be seen in the light of not listening to what they say but looking at what they do, which is a very different story.

The evidence provided by Treasury to the Senate Standing Committee on Economics indicates that the compliance costs will likely outweigh the relatively paltry revenue savings. The Senate inquiry received seven submissions from leading industry groups and experienced practitioners—not from those ideologically bent on dismantling and punishing certain families—and each expressed their condemnation for these changes. Yet, unfortunately, but I think rather predictably, the government members on the committee used the report to support the bill. Despite all submissions opposing the change, the Labor senators’ ideological objection to family trusts was front and centre in their approach to the report. I do find it quite disappointing that the government members of the Senate economics committee have chosen to simply ignore all the evidence presented to the inquiry, to support their original position and to waste taxpayers’ money in the process.

There is the clear hypocrisy here of the government claiming that this schedule is being proposed as a revenue-saving measure—there is no tax loophole here—and then spending taxpayers’ funds on a Senate inquiry only to ignore all the evidence presented and just rubber-stamp government policy. I do not think it does those senators credit, either as an intellectual or as a practical exercise. If the government members are so concerned with taxpayers’ money being wasted, one has to ask why they deliberately ignore all the evidence presented to the Senate inquiry and continue to push ahead with this proposal even though it should be condemned as a useless piece of sophistry and an unacceptable burden of increased red tape.

As I have said, we do support schedules 1 and 3 of this bill and we do support an ongoing program of sensible tax reform that clarifies the law and reduces the compliance burden. We will, however, be moving an amendment to excise schedule 2 from the bill so that the rest of the non-controversial elements can be passed quickly. I do hope that the crossbench senators will agree that families are more diverse than just children and grandchildren. Families come in many shapes, forms and configurations and I certainly hope that the crossbench senators will support what I submit to the Senate as a very sensible and defensible coalition amendment.

Annette Hurley (SA, Australian Labor Party) Share this | Link to this | Hansard source

The Tax Laws Amendment (2008 Measures No. 4) Bill 2008 does indeed have three parts. The first one, schedule 1 on demutualisation is, I understand, supported on all sides. Demutualisation of mutual funds seems to be an increasing trend. This action was triggered by that increasing trend and the bill will ensure that people who became shareholders in MBF after it demutualised this year do not pay any extra tax on the shares that they acquired. This is a sensible measure and one that was supported by the Senate Standing Committee on Economics.

The schedule which evoked most controversy was schedule 2, which deals with family trusts and fulfils an election commitment by the Labor Party. It reverses a change to the act that was made only last year. These amendments revoke much of that act. It was indeed a pre-election commitment by the Labor Party. Therefore, the Labor government believes that it has some mandate to do what it is doing in this amendment. It is part of the budget measures.

I will not talk about the nature of family trusts or indeed about the ideological positions on it. If the Labor Party had an ideological problem with family trusts, presumably we would have taken far more drastic action than is being taken here.

The opposition has criticised it as a tax increase measure and claims that this is what the Labor government is all about, conveniently ignoring the schedule before, which decreases the tax take. The provisions relating to demutualisation mean that some tax that would have been collected is forgone. Not this current year but next year, the financial impact is estimated to be a reduction in tax of some $2 million. In the following year, that reduction will be $1 million. So the logic of that argument defies me. Both of these measures are a result of policy and budget decisions by the Labor government that have been part of a difficult balancing effort in making sensible changes to various aspects of the budget.

There was also quite a lot of discussion during the Senate inquiry hearings about just how much money would be saved by this measure. Senator Coonan, in her speech on the second reading, quoted the figure of $1 million, which is the figure the opposition prefers to use. It does indeed save, as we heard in evidence, $1 million in the 2008-09 year, but that goes up to $6 million in the three subsequent financial years. This is indeed a tax-saving measure for the government. It will increase the tax take, but the policy was taken to the people of Australia at the election last year and so it is justified. It is a position that has been consistently held by the Labor Party, and indeed Senator Coonan noted that the Labor Party opposed measures brought in last year by the then Liberal government. The Labor Party has behaved perfectly consistently on this policy decision. It believes in the policy and it has implemented it as the government.

The opposition has also said that the Senate Economics Committee ignored evidence given by a number of people—people who did not like having to implement changes to the family trust structure. That is completely understandable. It does involve a small expense and a reconsideration of family trust structures. These structures are very useful, particularly in rural communities for farmers but also for professional people in both rural and city areas. Clearly, they are widely used. We heard evidence that there are between 400,000 and 500,000 family trusts around Australia.

The committee did take into account that this would cause some inconvenience and problems for some people who hold family trusts—not all of them, because it very much depends on the circumstances. The committee considered that very carefully. There was a submission from Treasury. The committee as a whole considered that the questions raised by the people who provided evidence in opposition to the measure were answered. This was a pre-election commitment by the Labor Party, an integral part of the budget measures and part of the government’s difficult juggling task in trying to produce a budget which addressed the difficult challenges that we are facing. This is a measure that should be supported. The Senate should support it.

We have been through this many times in this chamber recently. The government were required, because of the difficult economic circumstances that we found ourselves in when we came into government—high inflation and rising interest rates—to produce a difficult budget. In order to do that, the government said that they had to make some tough decisions. They said that a surplus would be required in order to put downward pressure on inflation. This measure assists in that process. It is part of a pre-election commitment. I strongly support the measure on those grounds.

A government is put in place to govern. Putting the budget in place is one of the most difficult features of that, particularly given the global economic circumstances in which we find ourselves today. Therefore I think the government deserves support. It is sound on a policy basis. It is sound on a consistency basis, and it is sound on the basis of fulfilling a pre-election commitment. Whatever criticisms the opposition may make of this government, they cannot criticise the fact that it has been rigorous in implementing pre-election commitments. Therefore, it is incumbent upon the opposition to give support to all of these measures and not just pick out the measures that might cause a reduction in revenue, such as the demutualisation, but to give support to this bill as a whole.

Barnaby Joyce (Queensland, National Party) Share this | Link to this | Hansard source

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—

Nick Xenophon (SA, Independent) Share this | Link to this | Hansard source

A Trojan Horse.

Barnaby Joyce (Queensland, National Party) Share this | Link to this | Hansard source

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

Nick Xenophon (SA, Independent) Share this | Link to this | Hansard source

Helen!

Barnaby Joyce (Queensland, National Party) Share this | Link to this | Hansard source

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.

Nick Xenophon (SA, Independent) Share this | Link to this | Hansard source

At the outset—with an abundance of caution, given that I have not yet filed my register of senators’ interests as I have only recently been sworn in—I think it is important to disclose that, just like thousands of Australians, I am a trustee and a beneficiary of several private trusts, including a private super fund and one associated with my very small legal practice.

That said, the Tax Laws Amendment (2008 Measures No. 4) Bill 2008 has three schedules. Schedules 1 and 3 are uncontentious. However, schedule 2 has proven to be the source of some debate. Schedule 2 relates to family trusts and the way ‘family’ is defined in relation to these trusts. I note the proposed changes to that definition as outlined in schedule 2 will significantly impact on between 200,000 and 400,000 family trusts, many of which have been set up by family businesses and farming families.

I also note a comment in the Age on 21 June 2008. It was in an article by V Burrows and was titled ‘Wither wax and wane tax changes?’ It stated:

The Rudd Government has revoked changes made by the Howard government, which allowed the revenue collected by family trusts to be distributed to “lineal descendants”. That means, anyone outside the immediate family will have to pay tax of 46.5% on distributions. For those in the know, this is the most controversial change in tax law this year, a change that will affect millions of people who have family trusts attached to small businesses.

This new bill, by seeking to limit the definition of ‘family’ to lineal descendents—to children or grandchildren—of the test individual or the test individual’s spouse, has significant ramifications. There are a number of minor exceptions, but the thrust of schedule 2 is quite significant in its scope.

This is a significant departure from the previous definition, which allowed non lineal inclusions within a family over a period of no more than 80 years. My concern is that these changes will have a large and detrimental effect on family run businesses, small businesses and farms. It will limit the way small businesses can be structured and family farms can be run. I agree with Senator Coonan that the definition of ‘family’ has broadened in terms of contemporary society, and I think that the definition that the government is seeking to introduce is a retrograde one, given the realities of modern life. I am also concerned that many of these family businesses and family farms have already structured their affairs around the previous broader definition of family and that a redefinition may cause an unfair burden on many of them. Many will have to undertake a significant restructuring of their affairs, and some families may face the very real prospect of having to tell relatives who were previously in that they are now out.

Of course, there is the issue raised by Senator Joyce of compliance costs. It concerns me significantly that there will be compliance costs which could well be in the tens of millions of dollars in order to comply with these changes, and I note that the opposition’s position is that the revenue raised from this would be in the order of $6 million. I think the government’s position in terms of forward estimates over the next four years would be in the order of $20 million. But even on the best case scenario in terms of what the government thinks it will gain from this, I cannot see that it is worth it given the compliance costs to hundreds of thousands of small businesses. I think it is fundamentally unfair in that regard.

I have one question for the government, and it relates to the issue of the administrative costs of these changes: have they been factored in by the government? Obviously there will administrative costs if these changes to schedule 2 are passed. What has the government allowed for the compliance costs? What does the government say it will actually rake in over the next four years with these proposed changes? Having posed that question, on balance I see this as an unnecessary and fundamentally unfair change, and it will impact on the small businesses and farming families of Australia.

David Bushby (Tasmania, Liberal Party) Share this | Link to 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.

Steve Fielding (Victoria, Family First Party) Share this | Link to this | Hansard source

The Tax Laws Amendment (2008 Measures No. 4) Bill 2008 deals with a couple of issues of special interest to Family First, those being family trusts and the demutualisation of health funds. On the issue of family trusts: to be blunt, the government is being stingy. The government says it is proposing changes to family trusts to stop people using losses to reduce their income tax ‘to help fund more urgent priorities’. But a quick look at the numbers show this is a furphy. The government will not be able to fund much at all from this change. The government says it will increase tax revenue by $1 million in the first year and $6 million in each of the three years after that. Evidence to the Senate inquiry into this bill was that any increase in the tax take would be much less than that.

Accounting groups also question the government’s policy approach. Most trusts last about 80 years, so why would the government decide to stop them halfway through their life? The government is trying to limit the reach of family trusts to two generations—so to grandchildren but not to great-grandchildren. That change is likely to affect more than 400,000 family trusts, so it will have quite a wide impact on compliance requirements for family trusts with relatively little increase in revenue in return. It will penalise families passing their businesses, such as farms, from generation to generation and will create a mountain of red tape and bureaucracy instead of allowing families to have legitimate family trusts.

I will now turn to the issue of demutualisation of health funds. In the bill there are tax changes with regard to the demutualisation of health funds, which the government says are to provide ‘relief from capital gains tax for private health insurance policyholders when their insurer demutualises to a for-profit insurer’. The government has argued that these amendments are ‘intended to facilitate the demutualisation of private health insurers’, but Family First questions whether demutualisation is always such a good thing.

The trend to demutualisation was triggered by the Howard government when, in 2006, it voted to sell off Medibank Private. Family First warned that the Howard government’s decision would open the way for other health funds to opt for the profit-driven model. At the time, health fund NIB’s CEO said that the Medibank sale would cause a ‘tsunami’ of change in the industry and result in ‘fewer and larger players’. We have since seen that the change with the NIB health fund demutualising and listing on the stock exchange means that profits now come before the health policies of families. The loyalties of NIB are now to shareholders, not to policyholders. There have been further moves towards fewer and larger players in the industry since then. MBF demutualised in June and is merging with the BUPA Australia Group. Just last month the Australian Competition and Consumer Commission approved the taking over by Medibank, Australia’s largest health insurer, of Australian Health Management. And, again last month, Australia’s third largest health insurer, HCF, made a bid to merge with Manchester Unity Australia.

The concern is that these changes will lead to further demutualisation and moves to a for-profit model, and the Rudd government seems content to encourage this. Demutualisation means that Australian families will have less trust in private health funds to put their needs first. Demutualised companies need to earn 30 per cent more just to cover the loss of their tax exempt status. Funds listed on the share market need to make profits above and beyond that to provide a return to shareholders.

Private health insurance is a huge cost to many Australian families. More than one in two adults has made the financial sacrifice to take out insurance, with the highest take-up rates among couples with children. Families with private health insurance are depending on the guarantee that they will have access to quality hospitals at affordable prices. This has been put in danger by the insurers opting for a business model that puts profits before members. Family First is considering supporting this schedule, not to support demutualisation but to clarify the tax treatment for ordinary Australians caught up in these corporate changes.

Bob Brown (Tasmania, Australian Greens) Share this | Link to this | Hansard source

The Greens support the Tax Laws Amendment (2008 Measures No. 4) Bill 2008, but, as we have heard, it is complex, and I thank the previous speakers for their contributions. I should say at the outset that Senator Hanson-Young, Senator Milne and I are members of private health funds which may or may not be affected by this legislation. The process of demutualisation that Senator Fielding just spoke about is one of concern, although I am not sure that this legislation will accelerate that process. It is a process that is underway without this law being brought before the parliament.

On the family trust issue, there is a cogent argument for lineal descent to be extended. But, on balance, the Greens are concerned about the use of trusts for tax avoidance, because, where taxes are avoided, the burden goes onto other people who are paying those taxes. It is a $20 million saving over forward estimates, although, as Senator Bushby said, when you get into it, it is very difficult to substantiate the amounts in either direction. However, the government did flag these changes in its presentation to the electorate in the run-up to the last election and, as part of that, has a legitimate reason to bring the legislation before the Senate, albeit reduced in the scope which the government advocated when it was in its role as opposition. The Greens opposed the measures of the previous government which are now being reversed by this legislation, so, consistent with that, we will be supporting this legislation.

Stephen Conroy (Victoria, Australian Labor Party, Deputy Leader of the Government in the Senate) Share this | Link to this | Hansard source

in reply—I thank the senators who have taken part in the debate on the Tax Laws Amendment (2008 Measures No. 4) Bill 2008. Schedule 1 provides relief from capital gains tax for policyholders of private health insurers who convert from being a not-for-profit insurer to a for-profit insurer by demutualising. The amendments will facilitate the demutualisation of private health insurers and will apply from 1 July 2007. These amendments disregard any capital gains or losses that arise to policyholders under the insurer’s demutualisation.

With regard to schedule 2, the government will proceed with the reversal of two of the family trust changes introduced by the previous government in 2007. These amendments restore the previous definition of ‘family’ in the family trust election rules by limiting the range of lineal descendants who can access benefits associated with tax losses. The amendments also prevent family trusts from making a variation to the test individuals specified in the family trust election other than specifically in relation to the 2007-08 income year or in the case of a marriage breakdown. These changes both reduce the scope for family trusts to be used to lower income taxes and demonstrate the government’s commitment to ensuring that every single cent of new spending for the coming year has been more than met by savings elsewhere in the budget. The government will not be supporting the opposition’s amendment.

Finally, this bill implements various minor amendments to the law and also some general improvements of a minor nature. These amendments reflect the government’s commitment to the care and maintenance of the tax system. Again, I would like to thank those who have participated in this debate.

Question agreed to.

Bill read a second time.