How the Morrison government can fix the ATO trust business debacle: Robert Gottliebsen

The Morrison government can turn around the ATO trust business disaster, which has the potential to be a franking credits-style election issue. Picture: Brian Cassey

The attempt by the Australian Taxation Office to make trusts far more dangerous for small and medium businesses in Australia has the potential to be a franking credits-style election issue.

But it also gives Coalition the chance to turn a disaster into a plus.

Many in the community dislike trusts because they allow income from a business to be spread around family members, often to minimise tax. But they operate under local and international legal precedents that stretch back centuries. Hundreds of thousands of smaller and medium-sized enterprises use these structures.

The ATO has not changed the law.

It has found a drafting anomaly in the tax Act which makes it much harder to operate a business under the trust structure. In upholding the ATO interpretation of the anomaly, the High Court took the unusual step of pointing out their decision would have unfair consequences for many SMEs.

The ALP announced before the last election a franking credits policy that hit retirees and other selected members of the community but left others untouched. It was both unfair and political ­suicide.

In the same way if you want to change the taxation of trusts, make it open and fair. Don’t do it via legislative anomalies that make Australia the only developed country in the world to tax people on money that they have not received.

This time around it’s the Coalition under the gun rather than the ALP. Yesterday’s commentary under the heading “High Court tax ruling to haunt Morrison government” details what happened.

Many tell me that the tax commissioner is “out of control”. I think the truth is different – the commissioner is “not in control”.

The ATO has become a series of fiefdoms with their own agenda. If you are a SME and happen to be reviewed by a “good fiefdom” you will receive fair treatment. But if you are ensnared by a ruthless group then the consequences are dire.

In the Carter case the ATO fiefdoms not only hauled the medium-sized business to the High Court on a technicality but used their power to calculate a fictitious taxable profit.

If the Coalition wants to avoid a franking credits-style problem then it has to take two actions in the national interest. I would hope the ALP would back them.

First the Coalition must promise as a matter of supreme urgency to introduce into the parliament legislation that corrects that technical loophole.

Accountants are preparing to warn hundreds of thousands of businesses that their use of trusts has become dangerous. And the legislation must be backdated to at least 2014.

If the ALP will not back the government in that legislation Morrison might even pull off another miracle victory. If the ALP proposes corrective legislation and the government is mute then Albanese takes a step closer to the Lodge.

But correcting the anomaly is not enough.

We can be grateful to the standing committee on tax and revenue, chaired by Liberal MP Jason Falinski with the ALP’s Julie Owens deputy chair. Last year, they saw the widespread ATO abuse of SMEs and its threat to confidence in the Australian taxation collection.

Their recommendations should be adopted in the light of the latest fiasco.

Again it would be wonderful for the nation if both parties promised to legislate the recommendations. But if only one party adopts them that party will have a franking credits-style opportunity over the other.

Here are some of the recommendations:

● That the ATO develops and promotes an Australian Taxpayers’ Bill of Rights that clearly outlines taxpayers’ rights and obligations. The US Bill of taxpayer rights includes the right to be informed; the right to quality service; right to pay no more than the correct amount of tax; right to challenge the Internal Revenue Service’s (IRS) position and be heard; the right to appeal an IRS decision to an independent forum; the right to finality; the right to privacy; the right to confidentiality; the right to retain representation; and most important of all, the right to a “fair and just tax system”.

(My comment: surely as Australians we are entitled to those rights.)

● That the ATO “ensure” that debts are not be payable by the taxpayer until a final determination is made by the relevant dispute body or court.

● Legislation be introduced to shift the onus of proof to the ATO in relation to allegations of fraud or evasion after a certain period has elapsed.

● Ensure that review panels include independent members, and that they be chaired at the deputy commissioner level or above.

● The ATO aligns the interest rate it charges taxpayers on any loans for tax liabilities to the interest rate paid by the federal government.

● The Inspector-General of Taxation be renamed the ‘‘Taxpayer Advocate’’, and that the role aligns more closely with the powers and structure of the US taxpayer advocate.

● The Inspector-General must have legislated rights to all tax data.

Again, we should be grateful to Julie Owens and Jason Falinski for showing the nation the way forward in re-establishing confidence in the ATO.