Wayne Swan zeroes in on family trusts but experts expect only tinkering in Federal Budget

The Federal Government has refused to quell speculation that family trusts will be targeted in next month’s Budget, but most experts expect tinkering at the edges rather than wholesale change.

Questioned yesterday on the use of family trusts by high-income earners to reduce individual tax bills, Treasurer Wayne Swan said he would “always judge these issues by what is best for lower and middle income-earnings Australian families.”

“And if others are using artificial means to avoid their tax then we should do something about that,” Swan said.

“The issue of family trusts was dealt with extensively in the Henry Report. But what they didn’t deal with was… the use of the low income tax offset by wealthy people.”

Tax Office figures show investment earnings from high-income earners have been allocated to more than 190,000 children via trusts, to reduce wealthy individuals’ tax bills.

Tamera Lang, tax counsel at the Tax Institute, says radical reform is unlikely, because there are already plenty of changes going on in the area, and trusts have had a lot of uncertainty over the past 20 years.

Lang says if anything, the Government could lower the tax-free threshold at which money can be distributed, from current levels of $3,333.

“The message from the Government is trusts are legitimate vehicles, particularly for primary producers,” Lang told SmartCompany.

She rejects the idea trusts have been misused by high-income earners, saying individuals are simply working within set parameters.

“There are already measures to stop tax avoidance.”

“The rules are reasonably tight.”

Still, while a tightening of the threshold is unlikely to have a large impact on individuals, collectively it will help the Government shore up its balance sheet, Lang says.

“One of these measures might be a small amount to the individual, but if everybody’s doing it, it ends up [being] quite a bit for the Government.”

Yasser El-Ansary, tax counsel at the Institute of Chartered Accountants, says there are 600,000 trusts which on average would have three to five beneficiaries.

“Multiply those numbers you’re talking about 1.5 million to two million taxpayers, which is about one-fifth of taxpayers across Australia,” El-Ansary has told SmartCompany.

Financial Services Minister Bill Shorten has insisted the Government would not tax trusts like companies – an idea recently floated by Shadow Treasurer Joe Hockey – but has refused to rule out further changes.

“But does that mean we have to accept written in stone, like the 10 Commandments, that a particular children’s income test should remain at one level?”

“Not at all.”