Tax Reform Wishlist

• Family Marginal Tax Rate:
  • Trusts and companies are used to stream income between partners with unequal income rates. Millions of companies and trusts exist for the sole purpose of alienating income. Whilst asset protection remains a dominant purpose, for many families it adds unnecessary complexity to their affairs;
  • Instead of taxing people as individuals, a Family Marginal Tax Rate would tax the household as one unit. This reflects the economic reality of household expenditures – families are not a series of individuals but instead share resources for common good;
  • Introducing a Family Marginal Tax Rate would reduce dead weight losses (legal and accounting advice), simplify the taxation system, improve fairness between lower and higher income families and reduce the need for millions of tax returns per year;
  • A Family Marginal Tax Rate would reduce the double handling of money where a government taxes a family where the spouses are on unequal wages and then gives it back through the family tax benefit scheme; and
  • It would increase the perception of fairness within the system as those on lower incomes consider those on higher incomes have an unfair ability to alienate income through trusts and companies.
• Section 126.15 should include E5 events:
  • Section 125.15 provides for capital gains tax rollovers in the event of a marital breakdown. Where assets are held in a trust or company 125.15 provides for a rollover of the cost base if transferred pursuant to a Family Law Agreement. An E5 Event is where property is distributed from a trust. In South Australia the stamp duty concession found in s71(5)(f) only applies to distributions rather than transfers. The section 71CA exemption only applies from spouse to spouse not from trust to spouse; and
  • Practically this means a taxpayer can either receive a rollover for CGT or a concession from Stamp Duty but not both. Including E5 Events in section 125.15 would remedy this unintended misalignment.
• Rework Section 328-G:
  • I have found in my practice the rollovers found in 122A or 122B are far better and easier to apply than 328-G. It is the case that I will never and have never recommended a 328-G for one reason or another. The Section 328-G is complex and inflexible;
  • Most obviously section 328-G should apply to rollover of a sole trader’s business into a company whose shares are wholly owned by a family trust which has made a family trust election in favour of the sole trader. It does not apply to such cases; and
  • Section 328-G should be the dominant small business restructure rollover relief provision.
• FBT Simplified:
  • FBT is a compliance nightmare for small businesses. The current legislation due to its complexity ensures non-compliance. An error will result in the business paying tax at the highest marginal tax rate on the value of the benefit;
  • The system should be reworked such that:
    • No highest marginal tax rate penalty for the employer;
    • Non-business related expenses are included in the employee’s assessable income; and
    • Each employee receives a reasonable upper limit for business related expenses (eg. Client lunches, Christmas party, in house rewards…) for which the company would receive a deduction. Any benefit provided which exceeds the limit would not be deductible to the employer; and
    • Include a general anti avoidance rule.
• Income Averaging for Small business:
  • Small businesses are volatile. They should have access to the same carry back provisions as primary producers. This will alleviate business making timing arrangements to absorb future losses. Carry back loss provisions introduced under Covid should continue but be expanded.
• Delete Section 102:
  • Section 102 relates to settlors being beneficiaries of trusts. If the settlor is not an excluded beneficiary then the trust is taxed at the highest marginal tax rate. Lawyers and accounts just settle trusts now. It’s a pointless provision with no benefit. The lawyer settlor will contribute $10 (which the client pays for) then the person who controls the trust might gift in $1Million. It’s a now redundant provision.
• Trust 99A Assessment charged at Corporate Tax Rate:
  • Section 99A assessments being charged at the highest marginal tax rate is severe and easily mitigated through default beneficiary clauses or distributions made to a company. Individuals with trusts will usually have a dump company or distribute to the corporate trustee;
  • If 99A assessments were taxed at the corporate tax rate it would significantly reduce the number of companies in Australia, I’d suggest by millions;
  • The trust would be entitled to franking credits;
  • Division 7A would then apply to those trusts who have been assessed under 99A going forward with any pre-existing loans included.
• Trustee Veil:
  • Where a business is operated through a trust with an individual trustee the individual will be personally liable for debts of the trust. A simple solution, often implemented, is to appoint a corporate trustee. A propriety limited company provides asset protection to the directors in many circumstances;
  • Providing a trustee veil to protect individual trustees from debts incurred by the trustee would remove the need for a corporate trustee in many cases. Providing individual trustees with limited liability would simply structures, reduce the need to seek advice and reduce costs of operating a business.
• Allow Distribution of Trust Losses:
  • Normally trust losses would be trapped within a trust. It is not difficult for a tax lawyer to push those loses down to the beneficiary through use of a Unit Trust where the unit holder borrows to purchase the units in a unit trust which then purchases an investment property;
  • Asset protection is a necessity to encourage individuals to go into business. If trust losses were more easily utilised trusts would be a simpler and more efficient investment vehicle.
• No GST Exemptions:
  • When GST was first contemplated it would have been a simple and easily calculable consumption tax. Independents complicated the tax and the debate was not well understood when it was proposed to the Australian people.
  • There are currently exemptions for food and renting residential premises, the proposal would be that any supply or good would be subject to GST.
  • The exemptions complicate the tax. Sir Humphrey would describe the decision as “Courageous”[1]. If the government increased social security by 10% and adjust the marginal tax rates to compensate such that the overall tax rate does not change, I believe we would still win the next election. Small business would thank the liberal party for it.
• No FBT Exemption for Not-for-Profits or Charities:
  • There is no reason why not-for-profits or charities should not be subject to the same rules as any other organisation.
• ATO Website:
  • The ATO website is dangerous in its lack of detail. The website should be fully referenced.
• Amend Section 770-10 – Burton’s Case[2]:
  • Burton’s Case is an example of the double taxation of Australian Residents. If we as a nation wish to encourage our citizens to run global companies we need to fix section 770-10.
  • To prevent double taxation in Australia and have regard to the manner in which other countries provide a discount the provision should be amended to read:
  • If all or any part of an amount of income on which *foreign income tax has been paid is included in your assessable income for the year, you are entitled to a *tax offset to your assessable income in the full amount of the foreign income tax paid.
  • The amount of the tax offset may not be used to offset any other amount of income included in your assessable income and may not result in a refund.
• Debt Restructuring Restructure:
  • The Covid Debt Restructuring Rules were and excellent initiative but were unworkable. Further without having any guidance on how the ATO would treat these arrangements and how they would vote in the creditors meeting made the restructure too risky to implement;
  • Australia should implement the Chapter 11 Bankruptcy provisions here to enable businesses to be open with their creditors and reduce the level of insolvent trading;
  • Business should be encouraged to go under more quickly rather than draw out the period under which they are trading whilst insolvent. The ability for the business to continue on after the insolvency event would save many jobs and small businesses.
• Finish drafting the Income Tax Assessment Act 1997.
• Continue Instant Asset Write Off:
  • The government should continue with the instant asset write off provisions indefinitely. This would not reduce the tax base overall but it would bring the deduction forward;
  • Accounting for depreciation over a businesses assets is onerous to say the least. It also does not represent the cash position of the business.
  • The objective would be to reduce the debt/equity borderline which gives a deduction for debt but not equity in Australia.
• Anti-Overtaxing Provisions:
  • Part IVA is an anti-avoidance provision which targets artificial schemes to reduce tax. There should equally be an anti-overtaxing provision where taxpayers who have failed to receive advice or received negligent advice are able to apply to the Commissioner with an alternative postulate where the taxpayer would have paid significantly less tax that would not have been structured as avoidance.

[1] Sir Humphrey: Oh, yes! “Controversial” only means “this will lose you votes”. “Courageous” means “this will lose you the election”!

[2] Burton v Commissioner of Taxation [2019] FCAFC 141; 372 ALR 193 (“Burton”)