Possible trust changes will not stop all tax minimisation

LET’S be pragmatic. Living in the greatest country on Earth doesn’t come for free. So pay tax, writes Barefoot Investor.

It’s too soon to be worrying about possible trust changes.

LAST week Bill Shorten told us he thinks there are two types of taxpayers: “Those that fly economy, and those that fly first class” (i.e. who can minimise their tax).

Hats off to the speech writer who came up with this analogy … who doesn’t hate those snobs that fly up the nose of the plane with their reclining beds and champagne, while the rest of us squeeze in next to a big bloke and eat warmed-up dog food with plastic knives and forks.

So where do you sit on Bill’s, errr, tax jumbo jet?

Well, let’s defer to former flight captain Kerry Packer, who told a parliamentary inquiry in 1991: “I am not evading tax … of course I’m minimising my tax, and if anybody in this country doesn’t minimise their tax they want their heads read, because as a government I can tell you you’re not spending it that well that we should be donating extra.”

Problem is, since Kerry said that, governments have systematically clamped down on ways to minimise tax.

The Libs stopped kids being used as a tax deduction and put caps on how much you can put in, and have in, super.

And last week Labor announced they’ll crack down on income-splitting via trusts, as well as increasing the top tax rate to 49.5 per cent and hitting negative gearing.

My view?

Both sides are guilty of fingering the economic pie ... instead of working out ways to actually grow it.

Seriously, we’ve lived through a once-in-a-lifetime mining boom and all we’ve got to show for it is a tin-can internet plan (NBN) and half a trillion ($500 billion) on the government credit card? And they need more of our money!?

Truth is, even with these proposed changes, you can avoid paying the top rate of tax (see my first answer below).

Yet let’s be pragmatic.

There’s a price for living in the greatest country on Earth.

So pay the tax. Just don’t tip ’em.

Tread Your Own Path!

Read more: 

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A suddenly single pregnant woman faces financial challenges 

CRAIG ASKS: I own a small business (cleaning) and, for the first time in years, I have the mortgage paid off and a bit to invest. Last week my accountant had me set up a family trust, costing me just over $2000. So you can imagine how shocked I was when I heard Bill Shorten talking about killing trusts! Should I take my money out again, or leave it in, or what?

BAREFOOT REPLIES: You’re a bit early aren’t you, cobber? I mean (Malcolm Turnbull) hasn’t even called the next election and you’re acting like it’s a done deal! Now, Bill Shorten’s argument is that it’s unfair that people who use trusts can split their income to lower their tax, whereas everyday workers can’t. Fair enough. It’s actually pretty hard to argue with that. Yet the ability to split the trust income with unemployed members of your (adult) family is really only a small side benefit to having a trust. (How many of these family members do you have?) The main reason you would have a trust is to protect your assets. The second is to avoid getting whacked with the top marginal tax rate. See, even with these proposed changes you still have the ability to cap your tax rate below 30 per cent (versus the top marginal tax rate of 47 per cent) by distributing income from the trust to what’s known as a “bucket company” and then using the franking credits to eventually lower your income. Anyway, back to your question. The bottom line is, trusts have been around since King Henry VIII — they’re not going anywhere!

 

THANKS FOR THE TIP

KATE ASKS: I have been on two dates recently (one a filmmaker, one an outdoorsy type) and both times when pulling out my Splurge card I was met with knowing nods, and then a conversation about “Scotty Pape”. First of all, I would never have thought Scotty Pape would be talked of in such tones of endearment by both an arty guy and a tough guy but, hey, you’re getting through. You seem to be the talk of the town in Melbourne. I think you have gone viral. It is concerning, however, that on a survey I did for ING, one of the questions asked how I had heard of ING. One of the options is “recommendation” and in brackets “(e.g. Barefoot Investor)”. I would like to believe you are not getting kickbacks from ING, though the cynic in me considers that this is either a form of advertising or a paid relationship you have with them.

BAREFOOT REPLIES: Thanks for bringing this to my attention. For the record, I’ve never received a cent from ING — or even so much as a ticket to their corporate box at the footy. I recommend the ING Direct Orange Everyday account in my book for a few reasons. First, because it’s the account my wife and I use. Second, because it has consistently been one of the best fee-free transaction and linked online saver accounts on the market (in my book I also talk about ME Bank’s transaction account, which is basically on par, but I’ve found their technology to be a little shall we say … Commodore 64). Third, because — until now — ING have respected my direct instructions not to use my name in any of their marketing materials. So I gave ING a call and they apologised for the “oversight” and told me they won’t do it again. Given that ING crowed in its latest annual report that “we increased customer numbers by 36 per cent on the back of a record take-up of our Orange Everyday account” (some 163,000 customers, according to the papers), so they bloody well should!

 

TIME FOR A LAWYER

RITA ASKS: My husband sold our family home without my knowledge. Yes — S.O.L.D. I.T! To give you some background, I am 36 years old and work in childcare, earning $45,000 a year. He and I separated some months ago. It was a slow decline but the time had come. A few weeks ago he asked me if we could reconcile our marriage, and I said I was not sure. He replied with, “Well, I’m done and I have someone coming to buy the house.” He then completed the sale with a 30-day settlement. He is telling me I will get nothing. What can I do?

BAREFOOT REPLIES: He’s not taking the separation well, is he? Understand that he’s not basing his argument on sound legal opinion, but on lashing out irrationally after being rejected. The first thing you should do is consult a family lawyer immediately and explain what’s happened. If your property was in joint names, he can’t just sell it from under you! The second thing you should do is move on. As part of the divorce there will be a division of assets, including proceeds from the sale of the house and it will also take into account any custody and child-support arrangements. Onwards!

 

THE BEST ADVICE

LISA WRITES: I do not have a question for you, I just wanted to say thank you. After three years of planning, last year I told my husband I wanted a divorce. There was a high level of domestic abuse in the relationship. The past 12 months have taught me who I can and cannot depend on, and you and your fantastic book have supported me through this time. Today I collected the keys to my new property — I’m a homeowner! I would not have got here without your help.

BAREFOOT REPLIES: Well done! Your question (like the one above) shows why it’s critical for women to understand, and take control of, their financial situation. I’ve met far too many women who stay in unhealthy relationships because they’re fearful they won’t survive financially on their own. You’ve proven that’s not the case. You’ve got this!

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The Barefoot Investor holds an Australian Financial Services Licence (302081). This is general advice only. It should not replace individual, independent, personal financial advice