Greens warn of private school fees loophole in Labor's trust tax

Greens concerned private school fees paid out of trusts could escape Labor's 30pc tax In short: The Greens say a "loophole" for private school fees is a sticking point in Labor's proposed trust laws. Jim Chalmers will introduce legislation for the 30 per cent minimum tax on discretionary trusts on Wednesday, amid stiff business opposition. What's next? Labor requires the support of the Greens in the Senate to pass the tax hike, given that the Coalition is opposed. Parents who pay private school fees from their trust funds could escape Labor's proposed trust tax, in what the Greens say is a "loophole" that must be closed. Treasurer Jim Chalmers will today unveil a bill to impose the 30 per cent minimum tax on some trusts. The budget proposal has enraged the business lobby and unnerved Labor backbenchers anxious about small business hostility. The Greens, whose votes are required in the Senate, have the opposite concern. On Tuesday, the party called for a Senate inquiry into the bill, saying an early draft was "watered down" and the proposal would not get a "free pass". The ABC can reveal the Greens' main concern is an exemption for money paid from trusts to charities, non-profits and other tax-exempt entities, including private schools. "People who are wealthy enough to set up trusts should not get a tax break to pay for private school fees when this option is denied to people who can't afford expensive accountants," Greens economic spokesperson Nick McKim told the ABC. "The treasurer needs to knock this out of the legislation." In a draft proposal last month, the government indicated it would cap the amount of exempt money each year, but that cap has not yet been set. The proposal does not change the tax treatment of private schools, since this avenue already exists. But by carving charitable payments out from the new higher rate of tax, the Greens will argue this makes the avenue more attractive. "There is far too much leniency," Senator McKim said. "Labor is just trying to funnel ever-increasing revenues into the private education system when public schools are being starved of funds." Chalmers beleaguered on two fronts Mr Chalmers says the proposal is a crackdown on those who use trust funds as a vehicle to reduce their tax bills. The 30 per cent minimum tax applies only to so-called "discretionary" trusts, a term the tax office uses to identify trust structures that give their owners the flexibility to shift their money into the names of family members, holding companies, or others. Tax experts say these complicated structures allow a minority of very wealthy, highly motivated people to achieve dramatic reductions in the tax they pay. The government expects to raise $4.5 billion from the tax in its first year of operation. But business lobbies and the opposition have argued discretionary trusts are used for a range of legitimate purposes, including by small business owners. The government has outlined several exemptions, including for family farms that are placed within trusts, charities that operate as trusts, and trusts that are set up to manage deceased estates. But Andrew McKellar, chief executive of the Australian Chamber of Commerce and Industry, said the tax still sent "the wrong message" and targeted business unfairly. "We urge all members of parliament to … listen to the views of those small businesses who will be affected: small and medium-sized home builders, family pharmacies, newsagents, small retailers, restaurants and cafes," he said on Tuesday. The government estimates that 350,000 active small businesses — roughly one in six — used discretionary trusts in 2022-23, the last year of available data. Treasury analysis suggests 140,000 of those would not need to pay the new tax. Others will get government assistance to restructure their affairs, although there remains concern that those who restructure their businesses as companies would have to pay state and territory stamp duties in the process. The concerns have been echoed by some Labor backbenchers, with several questions put to Mr Chalmers about the bill's consequences in a Tuesday Labor caucus meeting. Summarising the angst, one Labor backbencher told the ABC they were "not happy about these compounding attacks on small business". From little holes, big holes grow The government is wary about business hostility and has added further exemptions since May to address its concerns. The exemption for trust money given to charities, schools and sports clubs was one such concession. But Dale Boccabella, an associate professor of accounting and tax at the University of New South Wales, warned that every concession risked creating unintended loopholes, especially given trust laws are notoriously complex. "The reality is that a small minority of downtown lawyers and accountants sniff a little opening and they will make it into a big opening. That's the way it is. Whether we like it or not, that's the history in this area." Mr Boccabella said it was possible the law could be drafted with so-called "integrity provisions" to stamp out payments such as school fees if the parliament considers that they are not in the spirit of the law, adding that the Greens' concern was worth probing. "I know why people would be concerned. We've got a long history in Australia, going back to the 1970s, where people were making donations to church-run schools, and it was well known that the quid pro quo was a reduction in your school fees," he said. The High Court has tried to clamp down on that practice in the past, ruling that "gifts" to charities for tax purposes cannot come with strings attached. But even where these precedents exist, Mr Boccabella said enforcing them was a challenge for the ATO. "It's great having a rule, but you've got to enforce it on a case-by-case basis, and the ATO doesn't have the resources to administer even our current rules for trusts on a meaningful scale. They just cannot do it," he said. Mr Boccabella said his biggest concern with the draft laws was that people who choose to restructure from a trust into a company could still achieve much of the same discretion and could still substantially reduce their tax. "I think there's a case to be really blunt and really prescriptive … People exploit any break in the system, and the history tells us that this will get exploited," he said.