Just as SMEs begin to enjoy the benefits of business tax cuts, a new tax proposal on trusts could add tens of thousands of dollars to their annual tax bill.
The policy proposal by the federal opposition, announced over the weekend, would see discretionary family trusts pay a minimum tax rate of 30 per cent.
“A Shorten Labor government will introduce a standard minimum 30 per cent tax rate for discretionary trust distributions to mature beneficiaries (people over the age of 18),” Opposition leader Bill Shorten said.
“Labor’s policy will tackle the use of income splitting to minimise tax – making the tax system fairer and improving the budget bottom line.
“Wealthy individuals are much more likely to benefit from a trust than low and middle income earners.”
According to a more detailed proposal report released by the opposition, 98 per cent of Australian taxpayers will be unaffected by the proposed change to trusts. However, there are concerns that the SME community makes up a large proportion of those in the firing line.
“Today’s speech and accompanying fact sheet are light on specifics for a legitimate structure used widely for business, personal investment and family purposes,” said Chartered Accountants Australia and New Zealand (CA ANZ) head of tax, Michael Croker.
He highlighted a number of emerging questions about Labor’s proposed model, including addressing the potential for overtaxation, restructuring relief for those who may wish to exit discretionary trust structures, the equity of treating active small businesses differently from farmers, and the scope of carve-outs for farm trusts, testamentary, disability and charitable trusts.
Meanwhile, Mark Molesworth of accounting firm BDO told My Business’ sister publication Accountants Daily the proposal is likely to act as a tax increase for the many SMEs that operate through a trust.
“This proposal appears to be that all distributions from discretionary trusts (other than primary production trusts) will be taxed at 30 per cent as a minimum. Presumably, if a beneficiary’s marginal rate is higher than this, the higher rates will still apply,” he said.
“My concern with the implementation of this policy is for small business people who are ‘successful’ by Bill Shorten’s standards.”
Mr Molesworth referred to Mr Shorten’s claim that a nurse who earns $70,000 is successful, calculating that a husband and wife, each of whom is a nurse earning $70,000 per year, will pay, in aggregate, $31,400 in tax on total family income of $140,000.
By comparison, Mr Molesworth said that a husband and wife, each of whom is a plumber, who carry on business through a discretionary trust and earn a net profit of $140,000, would pay in aggregate a total of $42,000 tax under Labor’s plan.
“That is, the plumbers will pay $10,000 more in tax than the nurses on the same family income. Is this really what is intended?” Mr Molesworth questioned.
“Disadvantaging small business people in the pursuit of high-income earners does not seem like a smart move. It should be a case of targeting the behaviour, not the entity.”
Adam Zuchetti is the editor of My Business, and has steered the publication’s editorial direction since early 2016.