Never mind negative gearing. Australians pushed $67b through this tax vehicle

The number of people funnelling money through the increasingly popular vehicle of trusts in a bid to reduce their tax levels has surged by nearly 15 per cent.

As signs grow that the surge in housing and rental costs over the past three years is eating into the budget bottom line, data from the federal Treasury on Tuesday revealed distributions from trusts – often used by business owners, farmers and investors – have hit an all-time high.

There has been a surge in the number of people using trusts to help manage their tax affairs.Credit: Dominic Lorrimer

The annual tax expenditures report was started by then treasurer Peter Costello in a bid to track the cost to the budget of concessions such as lower tax rates on superannuation or the 25 per cent company rate for small businesses.

The single largest concessions are for superannuation, which will cost the budget $55.5 billion in foregone revenue this financial year – an increase over the $54.2 billion in 2023-24.

The next largest concession is the exclusion of the family home from capital gains tax, worth $51.5 billion this year, up 8 per cent on the $47.4 billion recorded last financial year.

But the amount of net income people reported they received out of trusts soared by more than 12 per cent, or $7 billion, to a record $67 billion. The number of people reporting income from trusts also increased, but by a much more modest 6 per cent to 1.8 million.

The increase in people using trusts was driven by people in the top 10 per cent of taxable income, with close to 420,000 people accounting for 63 per cent of all the net income moved through trusts, a step up from the 370,000 the previous year accounting for 61 per cent of all trust income.

Treasury said this large share of high-income earners claiming income through trusts was due to a “small number of individuals receiving very large amounts of income from trusts”.

The proportion of people on incomes of between nothing and $45,000 reporting payments through trusts fell to 31 per cent from 34 per cent. The share of people earning more than $200,000 who reported trust income reached a record 44 per cent.

Governments of both political persuasions have looked at overhauling trusts, including the Howard government in the early 2000s. Labor went to the 2019 election promising a 30 per cent tax on distributions from trusts.

Research this year from the Australian National University revealed thousands of people have used trusts to manufacture their official taxable income to avoid the existing $250,000 threshold from the Division 293 retirement income contributions tax.

The same report showed the cost of rental deductions – a key feature of negative gearing – will hit a record $26.5 billion this financial year before climbing to $32.4 billion by 2027-28. In its last tax expenditures report, Treasury had estimated rental deductions to cost $25.6 billion in 2024-25.

Treasury estimates 2.4 million people claimed $47.9 billion in rental deductions against $52.9 billion in gross rental income. This reduced their estimated tax liabilities by $16.9 billion. Of those with properties, about 1 million had a rental loss, making them negatively geared.

Rental deductions were just $17.1 billion in 2020-21, but the sharp rise in rents, higher interest rates and the costs associated with building repairs and alterations have pushed up the size of deductions being claimed by landlords.

Treasury estimates more than 80 per cent of the value of rental tax deductions went to people earning more than the median income, with 39 per cent going to the best-paid 10 per cent.

Higher interest rates and building repair costs have pushed up the cost to taxpayers from rental deductions.Credit: Adobe Stock

While the Australian Tax Office has tightened its policing of work-related expenses over recent years, the report shows it remains one of the main ways people reduce their taxable income.

This year, Australians are expected to use various expenses to reduce their taxable income by $11.3 billion. During the COVID-19 pandemic, when many people worked from home or found themselves unemployed, the value of deductions fell to $8.5 billion.

The single largest work-related expense remains car travel at almost a third of total deductions, while laundry and dry-cleaning accounted for 8 per cent. Other deductions include mobile phones, internet access and home-office equipment.

Treasurer Jim Chalmers, who has repeatedly defended the government’s tax agenda, stood by his previous changes to the tax system.

“The government’s already substantial tax reform agenda also includes making super concessions fairer and more affordable, ensuring multinationals pay their fair share of tax here in Australia, encouraging investment in important areas like housing and clean energy, reforms to the petroleum resource rent tax that will see the offshore LNG industry pay more tax, sooner, and improving tax compliance,” he said.

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