When Bill Shorten announced his policy on taxing distributions from family discretionary trusts on July 30, 2017, he did so under the banner of, “A Fairer Tax System For All Australians”. A close look at the policy clearly shows small business owners with trusts are not regarded as Australians, because they will effectively be taxed as foreign tax payers.
The policy is meant to attack high-wealth individuals based on the claim that “wealthy individuals are much more likely to benefit from a trust than low and middle-income earners”. A review of the taxation statistics produced by the Australian Tax Office for the 2014-15 year highlights how far Labor will go to justify this policy.
In the 2015 financial year out of just over 820,000 trusts, approximately 795,000 trusts were classed by the ATO as either making a loss, having no income, or regarded as a micro business, with only 216 being used by the so called wealthy that the policy is supposed to target.
Under the policy distributions to adults, anyone who is 18 or over, will be taxed at a minimum tax rate of 30 per cent. This means small business owners with a trust that takes a profit distribution rather than a wage, do not get the benefit of the $18,200 tax-free threshold or the 19 per cent.
The only other class of taxpayers to receive this sort of treatment are foreign residents who pay tax of 32.5 per cent on all of their income up to $87,000. This means small business owners receiving business profits as a trust distribution will pay tax at 30 per cent up to $37,000, and then at 32.5 per cent up to $87,000.
If the Labor party wins the next election, and this policy becomes legislation, a couple operating a business through a family trust will pay considerably more tax than a couple operating a business through a partnership of individuals. The problem with the partnership being the legal liability that attaches to the owners.
There are a few limited exemptions to this policy designed to redistribute income from small business owners to “ordinary PAYG workers”, despite the fact that small businesses employ the most “ordinary PAYG workers”.
Q. My dad is 94 and has rural property valued around $6 million, shares worth about $2 million and other property about $3 million. He has left his estate to my brother and me in a testamentary trust. I was wondering what the tax implications of Labor’s new tax policy would be?
A. The trusts that this taxation policy will not apply to includes special disability trusts and testamentary trusts. This should mean the estate planning actions taken by your father should not be affected by Labor’s new tax policy, but this depends on no other anti-small business taxation policies being announced.
Despite your father’s plans not being affected by the new tax policy you should get advice from a tax professional to make sure that the tax effectiveness of estate planning is not under threat by any other policies.