The Government's Taxation Reform Agenda for Trusts
Speech to CPA Luncheon
30 July 2012
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Thank you very much for your kind welcome. It is a great pleasure to be here for this special event hosted by the CPA Australia and it's good to see so many familiar faces.
Today, I would like to speak to you about the Government's taxation reform agenda, which I know is particularly important to Australian businesses as well as the taxation and accounting fraternity.
In particular, I will be providing some detail on the next steps in the Government's reforms in relation to the taxation of trust income. There are, of course, a number of different streams to this reform agenda and the purpose of today's speech is to outline the scope of these various streams and to bring them together as part of a wide-ranging, but coherent program of taxation reform for trusts.
But before, turning my attention to this important area of reform, I would like to make a few remarks about the state of the Australian economy and the Gillard Government's taxation reform record.
Strength of the Australian Economy
I'm sure you will have heard the Government and many economic commentators talking about the patchwork nature of the Australian economy. This is the expression used to describe how some sectors of the economy are experiencing strong growth - particularly as a result of the resources boom - whilst others are grappling with the challenges of a high Australian dollar and an increasingly cautious household sector.
It is in this context that the Government handed down its budget in May with a strong emphasis on the need to spread the benefits of the boom.
Whilst many households and businesses are facing their own particular challenges, we should not forget that the Australian economy continues to be the stand-out performer of all of the major advanced economies. As the Reserve Bank Governor recently observed, in relation to the Australian economy, "the glass is at least half full" and, as a nation, we have much to be confident about when it comes to our future growth prospects.
We have low unemployment, contained inflation, record low interest rates and, according to our Budget forecasts and those of the International Monetary Fund we are expected to grow more strongly than any other major advanced economy over the coming two years.
The Australian economy is around 10 per cent bigger today than it was before the global financial crisis.
This performance stands out when you compare it to other advanced economies - many of which are still hovering around their pre-GFC levels.
We have relatively low unemployment at 5.2 per cent. Around 800,000 jobs have been added to the Australian economy since the Labor Government came to power.
This compares to the loss of well over 25 millions jobs across the global economy throughout the GFC - and, of course, some countries still have fewer jobs today than they had four and a half years ago.
Back in Australia, the latest CPI figures released last week show that inflation is well contained.
With nebt Government debt peaking at less than 10 per cent, we have one of the lowest levels of debt at around 1/10th of the average of our major advanced economy competitiors.
This is an impressive result, particularly given that these indicators have been recorded against the backdrop of a record pipeline of investment, with over a half a trillion dollars scheduled to flow into the resources sector alone.
Record of Taxation Reform
These strong macroeconomic results are partly as a result of the reforms of successive Governments over the decades.
And we have continued this reform process since we came to office in 2007, particularly when it comes to taxation.
We have delivered over $47 billion dollars worth of personal income tax cuts and commissioned the most comprehensive review of Australia's taxation system for at least the last 40 years.
And we have been steadily progressing tax reform. The Government has implemented or announced around 40 measures that progress recommendations of the Australia's Future Tax System review, which has of course become more widely known as the Henry Review.
And let's not forget that many of the other recommendations in the Henry Review recommend that no action be taken or involve State Governments coming to the party for progress to be made.
We know that tax reform is an ongoing process.
To believe that Australia's tax system can be 'reformed' in one fell swoop or even in one term of Government is to ignore the lessons of history.
It would also ignore that the world continues to change - as you no doubt see reflected in the evolution of accounting standards.
Instead, tax reform is a long term project that requires ongoing commitment.
This is even more important in the current economic environment, where fiscal restraint is the order of the day, and the current political environment where the shadow of negativity for negativity's sake looms large over any prospect of bi-partisanship.
As I have said before, the release of the Henry Review in 2010 marks the start of a renewed national conversation on tax reform, just as the release of the Asprey Report did in 1975.
We continued the conversation initiated by the Henry Review with last year's successful Tax Forum.
And we have kept the momentum going in a number of areas, from the business tax working group to the Not-For-Profit Sector Tax Concessions Working Group.
And as part of the 2012-13 Budget the Treasurer and I released our Tax Reform Road Map.
This Road Map sets out our vision for the tax system, underpinned by three key themes:
- investing in a productive economy;
- ecouraging participation and reward for effort; and
- building a fairer and more sustainable tax system.
The Government's Taxation Reform Agenda for Trusts
A key example of the Government's ongoing commitment to tax reform is our significant work to modernise the taxation of trusts.
This is a reform agenda with three strands.
We have already announced that we will modernise the taxation of trust income by consulting on options to update and rewrite Division 6 of the Income Tax Assessment Act 1936.
We have also announced that the Government will introduce a new tax system for managed investment trusts (MITs).
And we are consulting on ways to clarify important trust tax concepts that have been causing some concern - including the concept of a 'fixed trust'.
Today I want to draw these three strands of reform together and outline the process that we will take to deliver these important reforms.
But first I want to make it clear that the Government is committed to progressing these reforms methodically.
The Government has been steadily progressing a busy legislative program. Since the Budget, the Government has passed over a dozen tax measures and consultation has started on over a dozen more.
And on the 18th of May this year I announced that the Board of Taxation would undertake a post-implementation review of the non-commercial loan rules in Division 7A - an important issue for many trusts with corporate beneficiaries.
Modernisation of Division 6 of the ITAA 1936
At the same time, we have been developing the next phase in the consultation process for trust taxation reform.
The submissions on the Government's 2011 discussion paper to modernise the taxation of trust income generally understood that achieving genuine and beneficial reform can take time to get right.
It is also evident from those submissions that there are many divergent views about the direction that reform should take.
However, there was general agreement about the stated objectives of the reforms, in particular the goals of reducing complexity and compliance costs.
Treasury is currently drafting an options paper that will elaborate further on the models for reform. For example, it will tackle important issues like how character retention and streaming will operate and provide details that allow taxpayers and their advisers to determine how the possible reforms might apply to their particular circumstances.
And the reforms will tackle key practical issues such as when beneficiaries' entitlements need to be determined.
All of these issues and all of the submissions from the CPA and other stakeholders will be thoroughly examined before any final decisions are made about how to reform the taxation of trusts.
I want to thank the CPA Australia for its valuable contribution to this process so far. I know that you will continue to play an important role in these reforms.
And the Government is committed to ongoing consultation on these important reforms. After the release of the options paper, a further round of face-to-face consultations will occur.
These meetings will allow a free exchange of information and ideas and will be timed to benefit stakeholders in finalising their submissions.
Today I am also releasing a revised consultation timetable that outlines the steps involved and the milestones we will need to achieve to ensure that these proposed reforms can take effect from 1 July 2014.
These timeframes will be tight. But they are manageable if we are all able to work collaboratively towards these important goals together.
The New Tax System for Managed Investment Trusts
As I mentioned earlier, another strand of the Government's agenda for trust reform is the new tax system for MITs.
We announced that we would introduce a new tax system for MITs after a detailed Board of Taxation review into the taxation arrangements applying to MITs.
We remain committed to delivering a new tax system for these trusts and following consultation with stakeholders including the CPA, the Government has decided to develop the new tax system for MITs alongside the reforms to Division 6.
It makes sense to progress these reforms together to provide more certainty for managed investment trusts, particularly because eligible MITs will have the choice of whether to enter into the new tax system.
The Government recognises that there are still some outstanding policy issues that need to be resolved and further consultations will occur with stakeholders in the coming months.
In arriving at the decision to progress these reforms together, the Government has listened to views expressed by stakeholders including the CPA that more time is needed to engage in a robust consideration of the issues and to allow industry to become familiar with the changes and adjust their systems accordingly.
It is the Government's intention for the reforms to MITs to commence on 1 July 2014 at the same time as the modernisation of the taxation of trust income reforms.
The Government will also extend an important interim measure to reduce compliance costs for MITs. These trusts will continue to have the choice whether to apply the interim streaming changes introduced by the Government in 2011.
This recognises that MITs generally observe the practice of distributing their income proportionately to unit holders rather than streaming income to specific beneficiaries.
The Definition of "Fixed Trust"
The final area of trust reform that I want to talk about today is the definition of a "fixed trust".
For many practitioners, fixed trusts can be the forgotten cousin of family and discretionary trusts.
But it should be remembered that around 10 per cent of Australia's 700,000 trusts seek to be treated as fixed trusts.
The Government recognises that the current restrictive definition of 'fixed trust' creates uncertainty for many trusts, from small private trusts to large managed investment trusts.
These concerns are not new - but last year, a Federal Court decision added to these concerns by confirming that the current definition of 'fixed trust' is very narrow.
As a result, many trusts would need to rely on the Commissioner of Taxation to exercise a discretion to treat them as a fixed trust.
However, this approach is unsatisfactory and unworkable in the long run because it creates uncertainty and complexity for taxpayers.
It also increases compliance and administrative costs for taxpayers and the Australian Taxation Office if every trust that wants 'fixed trust' tax treatment has to request the Commissioner to exercise his discretion.
And we know that 'fixed trust' treatment is important for many trusts. It plays an important role in many aspects of the tax laws, including the ability to pass through franking credits to beneficiaries, carrying forward losses, and is a central element of various rules that require tracing of ownership.
The Board of Taxation considered these issues in its review of the taxation arrangements applying to MITs and, as you would be aware, the Government has announced that MITs with 'clearly defined rights' will be treated as fixed trusts.
Today I am releasing a discussion paper that draws on this work and looks at the issue for trusts generally.
The discussion paper, which is called 'A more workable approach for fixed trusts', is to be released for consultation for a period of six weeks.
The paper considers the appropriateness of the existing definition of 'fixed entitlement' and looks at when it is appropriate for a trust to qualify as a fixed trust in practice.
In particular, the paper considers options for ensuring that trusts are able to satisfy the definition of fixed trust under the ordinary provisions of the law without relying on the Commissioner's discretion.
The challenge in this area, as it always has been, is to get the balance right between allowing trusts the necessary flexibility to deal with the realities of the commercial world, whilst ensuring that the interests of beneficiaries are effectively fixed in the ways that matter.
Consultation plays a valuable role in developing policy to guide changes in the tax law.
I look forward to receiving stakeholders' views on any one or more of the questions in the paper or any other matter relevant to the definition of fixed trust.
It is the Government's intention that any reforms resulting from this consultation be progressed alongside the re-write of Division 6 and the introduction of the new taxation system for MITs.
I want to thank the CPA for its valuable contribution thus far and welcome you and your members' ongoing involvement in these reforms.
And I'd like to thank the CPA again for inviting me here today to talk about this important topic and I would like to thank you all, in anticipation, for the contribution that many of you will make in contributing to the implementation of these important reforms.