An idea: Individual Investment Trusts (IITs)
Should someone who earns $200k in one year, and zero in the next, pay the same amount of tax as someone who earns $100k in each of two subsequent years?
There is a lot of discussion in Australia at the moment about superannuation, negative gearing, and capital gains taxes. This isn't surprising. The budget is in deficit and the existing combination of rules surrounding these taxes are absurd. Genuine solutions are few and far between. I’d like to put one forward here. It’s based on the idea that everyone should be treated equally.
Today, we are not equal. Three people, one of whom makes a living through investment effort, one of whom makes a living through a company they control, and one of whom takes whom a wage, are all faced with very different taxation situations. It’s one of the core reasons why the negative gearing and capital gains discussions can become so tense.
Now image if the government created a new entity called an Individual Investment Trust (IIT), designed to alleviate this inequality. The trusts would have a negligible cost to setup, so that every Australian taxpayer could feasibly establish one. They could own assets and they could have an associated bank account.
All income from an individual would go into their IIT. All investments purchased by an individual, including real estate and shares, would be held by their IIT. Whenever an individual transfers cash out of their IIT and into their transaction accounts, they pay tax on the funds transferred. It’s a little like everyone having their own little company.
Importantly, the government would mandate the details of the relationship between the IIT and the associated individual so that taxpayers could transfer their homes into their IIT without being penalised by mortgage lenders.
There are lots of perks to this approach:
- Everyone gets treated the same whether they are wealthy or not.
- Everyone gets treated the same no matter how they earn a living.
- The complexities of the ‘negative gearing’ and ‘capital gains tax’ debates disappear.
- Salaried individuals are no longer discouraged from being entrepreneurial, since they get the opportunity to use pre-tax dollars to start new businesses, just like wealthy individuals with complex trust and company arrangements get today.
- We get an opportunity to change how superannuation is managed in the future since simply the incentives for people to stretch the expenditure of their income over a longer period of time.
- Incentives for taking wealth offshore change.
Let’s save exploration of those last two items for another time.