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Labor must clarify its trust issues

Tony Mahar, CEO of the National Farmers' Federation, says farmers will be loathe to entrust their trusts to a Labor Government after hearing this week that longstanding tax policies are set for a shake-up.

More than 27,000 trusts exist in the farm sector (a sliver of the 823,000 which exist across the economy), and they play an important role in the structure and viability of those businesses.

Trusts are far more than a tax minimisation tool for farmers. They are used to ensure business assets are protected for future generations when misfortune strikes. They are used to compensate family members for their hard work. They also help even out the seasonal perils farmers endure.

Despite the Opposition’s rhetoric, you won’t find many of these 27,000 farmers sunning themselves in Capri this month or quaffing Grange by the fire. They are typical members of the farming community –farmers who use trusts deal with volatile income streams, global market price fluctuations and weather conditions while also trying to ensure their sons and daughters have the chance to experience life on the land one day.

Trusts are an invaluable tool for the enormous generational transition underway in our industry, as Baby Boomers make way for the next generation. Trusts are a smart choice to ensure the outgoing generation are provided for in their retirement, without saddling young aspiring farmers with insurmountable debt.

Perhaps most importantly, trusts enable families and partners to pool their assets to run a business with scale. We live in an era where scale is a necessity to keep pace with fierce competition from overseas markets, and an effective trust structure can be the difference between several marginal businesses and a single competitive one.

Family trusts play an important role in Australian agriculture. Any move to make changes to the way trusts are taxed or administered needs to be carefully considered.
Tony Mahar, CEO, National Farmers' Federation

These are critical factors which we fear may have been overlooked in the development of Labor’s forthcoming tax policy. Why our skepticism? Because to date, farmers have not been consulted on Labor’s plans.

The risk of Labor’s black box policy process delivering a red tape doozy for farmers is high. Over the last week, Labor spokespeople have been zeroing in on the use of discretionary trusts for so-called ‘income streaming’. This hints to a policy which will seek to distinguish fixed from discretionary trusts for tax purposes. This approach (if it turns out to be Labor’s proposal) is not a new idea. It has been weighed up, found wanting, and thrown on the scrapheap of half-baked ideas before.

Here’s why.

The benefits which farmers derive from the flexibility and security of trust structures cannot be realised from fixed trusts alone. Instead, discretionary (or hybrid) trust structures are commonplace. Creating a delineation between fixed and other trust types creates the first problem: you need to work out what you have. This is often not clear cut. Trust deeds can give a trustee limited discretion regarding distributions without enabling the sort of ‘income streaming’ Labor is targeting. Categorising and reviewing 823,000 trust deeds is a compliance nightmare waiting to happen.

The problems continue. Previous proposals to change taxation of discretionary trusts have failed the basic tax policy tests of equity, efficiency and simplicity. Ending tax flow-through treatment for discretionary trusts would exacerbate differences between these entities and partnerships (for example). Reducing consistency and arguably increasing inequality.

A change like this would generate significant structural costs across the economy, most of which would fall on the shoulders of farmers and small business owners.

Heaping red tape and compliance costs onto discretionary trusts will have cascading adverse policy outcomes. Farmers may be advised to adopt structures which are less suitable to handle seasonal fluctuations, business growth and intergenerational transition. This in turn is likely to reduce investment and innovation, the critical factors that will enable Australian agriculture to take the next big step forward.

Our farm sector is currently a bright spot in the Australian economy, surpassing $60 billion for the first time last financial year. We’re well on our way to achieving the industry’s goal of $100 billion by 2030, but this could be easily derailed by policy headwinds.

We don’t doubt the sentiment underlying Labor’s attempt to shake up trust taxation. But policies cannot be formulated in a vacuum, with no consideration of the structural changes underway in each industry and the role that trusts play.

There are surely ways to improve equity in our tax system without adding undue cost and complexity. This is a conversation the farm sector is willing to engage in, and one which needs to involve stakeholders beyond the confines of the Labor Caucus.

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