11 hours ago
‘Net negative': Positive Economics Advisory's David Williams-Chen delivers warning as Labor mulls family trust tax changes
Labor imposing a flat tax rate on family trusts could be a 'net negative' for the economy, an expert has warned after a report arose the government is considering trusts in its raft of tax reforms.
Sources told the Australian Financial Review Labor is likely to propose higher taxes on family trusts as Treasury ramps up scrutiny of the tax-friendly investment vehicles in its economic reforms.
Many Australian families and businesses use the trusts to protect their assets and split income between beneficiaries to reap the benefits from the lower tax rates.
The report follows Labor proposing a minimum 30 per cent tax rate on trusts as part of its failed swath of tax reforms it took to the 2019 election.
Positive Economics Advisory's managing director David Williams-Chen said if Labor were to apply a flat tax rate, Aussies would find a way to avoid it.
'People will respond to incentives and we see this time and again,' Mr Williams-Chen told
'Whether it's smokers buying black market tobacco to avoid paying high price cigarettes as excise levies have increased.
'Or whether it's the wealthy who have taken advantage of lower tax settings in superannuation before balance transfer caps and contribution limits came into place.
'We know there'd be a response.'
He pointed to research from US academics Shahar Rotberg and Joseph Steinberg where it was found increasing wealth taxes incentivised people to hide their assets and resulted in lower tax revenue.
Mr Williams-Chen urged the government to keep in mind taxpayers' capacity to avoid other taxes and even warned this could lead to a situation shown in the work of Rotberg and Steinberg.
'The evidence from the US shows that once the behavioural responses to wealth taxes on capital are factored in, there's a likelihood that they're actually negative for the economy,' he said.
'Rotberg and Steinberg in 2024 found wealth taxes would cause an overall decline in economic welfare between 0.3 and 0.4 percent.'
The individuals who are the beneficiaries of a trust pay their personal income tax rate on the distributions.
This means the tax paid on a trust can vary from zero per cent to 47 per cent.
Labor considering changes to family trusts, alongside plans to tax high earning super accounts and wind back electric vehicle rebates, come as Labor faces a decade of deficits and ballooning costs of the NDIS and defence.
The Albanese government also faces reduced tax revenue from lower tobacco excise and falling fossil fuel exports as Australia continues on its renewables shift.
