Budget to target family trusts

Tens of thousands of high-income parents who use their children to avoid paying tax will be targeted in a Budget night clampdown by Treasurer Wayne Swan.

The West Australian understands the Government will move to end a loophole that is being increasingly used by the rich to evade tax on income raised from real estate and sharemarket investments.

With the Government eager to honour its promise to bring the Federal Budget back into surplus in 2012-13, it is looking at all ways to raise extra revenue.

A long-standing concern of the Australian Tax Office has been the use of family trusts which are favoured by high-income earners to minimise their tax liability.

The tax office has drawn to the Government's attention a blowout in the number of children who are apparently earning income just below the tax-free threshold.

According to the ATO, in the 2006-07 financial year the effective tax-free threshold for minors was $1333. That year, 193,000 people had a declared income of between $1001 and $1333. The next largest group were the 82,000 people who earned between $417 and $1000.

By 2008-09, when the effective tax free threshold for minors had increased to $2667, there were 192,500 just below the threshold.

There were just 40,000 earning between $2000 and $2500, and 23,700 earning between $2668 and $3500.

The ATO argues that in many cases, non-wage income, usually earned from investments in property or shares, is being shifted through the trusts from the parents to their children.

A person earning about $20,000 in non-wage income, who has three children, can allocate up to $9999 of that income to those children who currently each have a tax-free threshold of $3333.

Instead of paying about $9000 in tax, the person would pay about $4500.

The Government believes there is clear evidence of trusts being exploited by high-income earners to avoid paying the tax on non-work income.

Trusts are heavily used by business operators. Latest figures showed there were 660,000 trusts that lodged tax returns, reporting business income of $291 billion.

While the Government will target tax evasion using non-work tax-free thresholds, it is expected to keep in place arrangements that give children an incentive to take part-time or casual work.

That means no change to the low income tax offset, heavily used by women and part-time workers, but a focus on compliance through the tax office's audit powers.