Opposition leader Bill Shorten outlined what he is calling a “bold and progressive” plan for family trust reforms over the weekend, confirming that if elected, Labor will treat discretionary trusts like companies and tax distributions at 30% — a move some in the small business community are calling “populism”.
Speculation last week over the Labor Party’s tax policy saw both accounting experts and small businesses raise concerns about potential sweeping changes to the trust system, which includes more than 800,000 entities, saying that the opposition’s plan might not have the intended impact of recouping revenue while maintaining a drive for entrepreneurship.
Now that the details of the opposition’s platform has been revealed, here’s what you need to know.
If the Labor Party was to win office, it says it would introduce legislation to introduce a standard minimum 30% tax rate for distributions made through discretionary trust structures. Currently, individuals who receive distributions from trusts are taxed according to the marginal tax rate that applies to their personal income.
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Labor’s proposal would apply to any distributions paid out of trusts to individuals over the age of 18. It will not apply to charitable trusts, trusts for farming assets, and non-discretionary trust structures like deceased estates and fixed trusts.
On Sunday, Shorten estimated the policy would recoup $4.1 billion in tax revenue over the forward estimates and $17 billion over the medium term.
Shadow Treasurer Chris Bowen confirmed to the ABC on Monday the policy will affect 318,000 of the nation’s 823,000 operating trusts, but says that while around 200,000 of these structures are “industry-related”, he insists the majority of small business owners will not be affected by the policy because they do not use trusts at all.
“Those businesses that do of course can continue for the legitimate purposes that they engage in trusts for, primarily asset protection and succession planning. And anybody who’s running or working in a small business and taking a wage is totally unaffected by this,” he told the ABC’s AM program.
SmartCompany has contacted shadow small business minister Senator Katy Gallagher for comment on what the policy means for those SMEs that do use trust structures, but she was unable to provide further comment prior to publication.
Is the “company treatment” the best option?
There has been a push from several sectors to revise the way distributions from trust structures are taxed, with a recent report from The Australia Institute highlighting the number of trusts in Australia has increased from around 330,000 in 1996-1997 to 642,000 in 2014-15.
In that report, taxation expert at the University of New South Wales Dale Boccabella estimated the tax revenue loss through trust structures amounts to $2 billion annually.
However, when it comes to the correct model for recouping lost revenue through trusts, there are dissenting voices.
As Boccabella told SmartCompany last week, he believes there is still a risk that those deliberately trying to rort the system will still be able to do so if trusts are treated like companies, because Australia’s tax imputation system could see some individuals on low marginal tax rates receiving tax credits when they are paid money through trusts.
He believes a completely different approach, in which an individual’s taxable income is more more closely linked to assets they control within trusts, would be a better option.
Tax experts, including BDO tax partner Mark Molesworth, say the plan could also be a disincentive to running a small business, when some business owners see they could be paying more tax through a trust they are using for legitimate purposes than individuals on higher incomes.
Molesworth uses the example of a couple who are both nurses and would pay $31,400 tax on a combined $140,000 income, while a husband and wife team who run a small plumbing business through a trust would end up paying $42,000 in tax if their income came through the trust.
“Some of the concerns expressed about the use of trusts — that they can be used to achieve lower effective tax rates than are available to salaried employees — are a function of the system incentivising entrepreneurial activity and enterprise,” Molesworth tells SmartCompany.
As to where small business operators will go if Labor’s tax plan eventuates, Molesworth says it’s unclear if they would move to instead use other business structures, like partnerships.
“Whether this tax disincentive outweighs the benefits of the discretionary trust structure will be an interesting case study for the future,” he says.
“Our greatest concern at present is whether the change will also dis-incentivise entrepreneurial activity.”
Small businesses want to catch rorters too: COSBOA
Asked whether any changes could force small business owners to abandon trusts and take other steps like incorporating their businesses, Council of Small Business Australia chief executive Peter Strong says it’s too early to know what SMEs would do.
However, he says the SME community also wants to catch out those doing the wrong thing, and says the trouble with family trust structures is that every business owner’s situation is so different.
“It’s populism — saying to everyone, ‘we have rich people, and we’re going to get them’. But we also agree that if someone is rorting the system, go get them,” Strong says.
Strong is awaiting further details on the policy from Chris Bowen’s office, and remains skeptical that there is enough evidence to suggest there is a problem with the way SMEs are using trusts.
The Labor party has confirmed it will not be preventing small businesses from using trusts for the purposes of asset protection or succession planning, with Shorten saying yesterday the tax on distributions would be “about making sure trusts serve their true purpose”.