‘Suddenly they’re worried about complexity? That’s a cop out’: Tax Institute

Tax counsel John Storey told Accountants Daily that the current tax system is designed to prevent double taxation of corporate beneficiaries. He explained that if a trust receives income, pays a 30 per cent tax, and distributes to a corporate beneficiary there is no credit, which means it would be taxed twice.

“On its surface that’s bad policy,” he said.

“It would also mean that very common distributions strategies from trusts would effectively be outlawed for all intents and purposes given the rate of tax that would be imposed. Such an outcome is an extreme result when there’s relatively straightforward ways to address it.”

Under the proposed legislation, individuals and other non-corporate beneficiaries would receive a non-refundable tax offset for the tax paid by the trustee and they will be required to declare their trust income in their tax return.

Corporate beneficiaries will not be able to claim credits for tax payable by the trustee. The stated goal is to ensure the minimum tax cannot be avoided when a trust declares a trust distribution to a corporate beneficiary or a “bucket company”.

Storey argued that the same outcome could be achieved if the company received a credit that was non-refundable when distributed to shareholders.

“An argument that’s been put against that is that it would be complex. But you’ve got to be kidding me,” Storey mused.

“The legislation that’s been introduced by this government over the previous months has massively complicated our tax system. Suddenly they’re worried about complexity? That’s an absolute cop out. If you want to prevent this kind of unfair outcome, it’s not that complex to have a separate franking recording process where franking credits that are received via this 30 per cent minimum tax can’t be refunded to shareholders.”

Commenting on the government’s goal for this proposed policy, Storey said “it is very clear that the government is playing to a certain segment of the community that feels that discretionary trusts are tax dodge schemes”, adding that this could be why it is eager to facilitate restructuring out of discretionary trusts.

“Rather than close perceived loopholes, they want to get you to not use them at all,” Storey said.

“A common tax strategy was distributions to corporate beneficiaries. Now, there's been an ongoing saga about the limits of that strategy and other integrity rules that limit what you can do with those strategies.”

The Tax Institute said it is also concerned about the deferral of critical administrative, reporting, notification, and collection arrangements to future tranches of legislation, arguing this limits stakeholders’ ability to fully assess the regime’s practical operation.

Storey said that according to his discussions with Treasury, the government wants to release as much information as quickly as possible to taxpayers and their advisers to minimise uncertainty.

“It’s achieved the complete opposite of that outcome,” he said.

“It’s created a lot of uncertainty in the community. It’s not entirely unprecedented to have a policy introduced in tranches. But that’s very different to rolling out legislation with gaps, faults and errors, and then trying to fill those gaps and correct those mistakes a month or two later.

“It’s clearly not being done to minimise disruption or fully inform the public. It's clearly being done so that this policy can be implemented as rapidly as possible. We’ve got law governing us now in areas like CGT and negative gearing where even though it’s law it’s not intended to apply in the way it’s already stated. It’s terrible tax policy.”

Storey also criticised the short consultation periods, noting that the negative gearing changes passed parliament while the consultation window was still open. He said this sends a message to The Tax Institute and the wider profession, which invests time and energy to write submissions on how the proposed policies could be improved, that the government is not willing to listen.

“There could be a time in the future where they really want the public's input for a policy. But people will say, well, what's the point? Because we're not going to get listened to,” he said.

“It's really been a frustrating few months when it comes to tax policy design and consultation.”