Tax experts say a possible plan by the Labor Party to treat family trusts like companies for tax purposes could have unintended consequences and not solve the inequality that Opposition Leader Bill Shorten wants to fight.
On Monday, the small business community hit out at the idea the Labor Party might propose revisions to discretionary trust rules when it unveils its new tax platform, saying the opposition has not done enough to explain the problem that needs fixing with the current arrangements.
However, there has been a push to review the tax concessions available to the 823,000 family trust structures currently in operation, and this week Fairfax reports one option on the table could be to treat trusts like companies for tax purposes.
The Tax Institute rebutted the idea that this would necessarily mean trust members pay more tax, with senior tax counsel Bob Deutsch telling the Australian Financial Review taxing trusts as companies would not be “a quick fix” because of Australia’s imputation credit scheme.
Australia’s imputation system allows corporate entities to pass on imputation credits to members when paying out profits of a company, to account for tax already paid by the business. These credits can be used to offset an individual’s taxable income.
The Tax Institute suggests a move to treat trusts as companies in this way could see some members of trusts ending up paying less, or even getting a refund on distributions paid from a trust if their marginal tax rate is zero.
Dale Boccabella, associate professor of Taxation Law at the University of New South Wales, tells SmartCompany family businesses should keep in mind that even if changes are made to the way trusts are taxed, it would still be possible to keep the other benefits of trusts, including how they allow for assets to be passed on in a family business.
However, he says taxing trusts as companies is a problematic way to solve the concerns some have about equity in the system.
“If the company imputation stays, all the tax minimisation games will still go on, and you haven’t addressed the tax minimisation problem,” he says.
Boccabella says policymakers need to go back and review the problem they are trying to solve here. If it is recouping tax from family trusts, one option would be to develop a model that links assets held in a trust to the person who controls the trust in the first place for tax purposes.
In a similar way to the social security system, this would mean “attributing the assets to the people who control them and had them in the first place” for income tax purposes, he suggests.
Coming up with the terms of such a model would be complicated, Boccabella says, but if any political party is to make changes to the trust system, the long term impacts need to be well thought out.
Asset protection and succession planning options also exist outside of family trust structures, and Boccabella says small businesses should keep in mind that even if policies do change, there will still be ways to protect your commercial assets.
Earlier this week Council of Small Business Australia chief executive Peter Strong told SmartCompany any changes to trust structures would no doubt take up time, because SME owners would have to comb over the details.
Boccabella says while he believes changes do need to be made to address equity issues caused by trust structures, any changes need to be well-reasoned and informed.
“If you really have a principle and you want to address the problem, you want to follow through,” he says.