CPA welcomes Labor scrapping trust fund tax reform, financial advice deductions

small business tax budget

Labor has officially distanced itself from a suite of tax proposals it took to the 2019 federal election, extinguishing the party’s former goals of discretionary trust tax reform and capping tax deductions on financial advice.

On Sunday, Shadow Treasurer Jim Chalmers said a proposal to tax family trust distributions at a minimum of 30%, a policy announced before Labor’s disastrous 2019 election defeat, will not feature in their 2022 election plan.

Labor’s proposal hoped to do away with discretionary trust structures allowing high-earners and small business leaders to distribute income and investment returns to beneficiaries in lower tax brackets, reducing their overall tax liability.

The policy was projected to raise $4.1 billion in revenue over four years, a move then-Opposition leader Bill Shorten would help ease inequality in Australia.

Labor has different plans this time around, Chalmers told Sky’s Sunday Agenda.

“There was an agenda at the last election, which we are not proceeding with,” Chalmers said.

“We said that the priority in tax reform is to make the multinational tax system fairer. Most of the countries around the world are coming to that conclusion too, and we want to work with them on that.”

Still showing the scars of that election defeat — in which the electorate rejected overarching changes to trusts capital gains tax, and negative gearing — Chalmers said the Morrison government “wants to re-prosecute the last election campaign because they’ve got no ideas about the future.”

Elinor Kasapidis, CPA Australia’s senior manager tax policy, said the decision affords local SMEs some “breathing space” ahead of the next election.

Many small businesses operating under trust structures could have faced an effective tax increase if the policy came into play, she said.

“That would really start to impact on their margins and profitability, and at the moment, particularly after COVID-19, small businesses are still recovering, they’re still doing it tough.

“So it’s good to hear that Labor has confirmed the proposed 30% tax is off the table, because that gives small businesses more certainty and relief.

“It was very possible they would have had to look at their trust arrangements or restructure things, or just end up having to pay more tax as a result.”

Susan Franks, senior tax advocate for Chartered Accountants, said the decision to enforce a minimum of 30% tax on trust distributions would likely have “really impacted” how trusts disperse funds to family members.

On Sunday, The Australian Financial Review also reported Labor has scrapped its one-time plan to cap the tax deductions available on tax advice at $3000, a move it claimed would level the financial playing field for Australians who can’t afford extensive advice come tax time.

“If it hasn’t been announced, it’s not Labor policy,” Shadow Assistant Treasurer Stephen Jones told the paper.

The disappearance of that policy from Labor’s 2022 platform is a “sensible outcome”, Kasapidis said.

“We have been strongly against this proposal right from the beginning.

“While it’s positioned as an initiative to reduce claims from high-wealth individuals, the truth is the cost of advice can get expensive, particularly for specific life events, and when you’re moving between countries.”

“Australians shouldn’t be denied or charged more for tax advice simply because they have complicated or unusual affairs to deal with,” she added.

Franks agreed that Labor made the correct decision.

Capping deductions at $3,000 “would have really hit people hard when there are difficult moments in their life, like navigating relationship breakdown, dealing with the tax implications of death in the family, winding up a business or planning a retirement,” she said.

“So we believe that Australia shouldn’t have had to pay tax on money spent getting tax advice in those difficult situations.”

Kasapidis said any eventual government should undertake a formal review of Australian trust arrangements, using insights from industry experts and stakeholders.

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