Yesterday, the Labor Party revealed plans to impose a 30 per cent tax rate on distributions from discretionary family trusts, with Treasurer Scott Morrison tweeting today that “Shorten has confirmed his new Family Business Tax will hit at least 200,000 small businesses”.
Chartered Accountants Australia and New Zealand (CA ANZ) has responded to the proposition, urging Labor to focus on indirect tax reform, allowing for a broad base, low rate personal tax system.
“What we’re seeing from the major parties is a piecemeal approach, with a bit of extra income tax tacked on here and a specific deduction denied there. The message conveyed is that something is being done to someone else to tax them more heavily,” CA ANZ head of tax, Michael Croker said.
“Meanwhile, Australia’s income tax system remains dangerously over-reliant on PAYG collected from Australians in the top tax brackets and company tax paid by a comparatively small group of large companies.”
While not supportive of the 30 per cent minimum tax proposal for discretionary trusts, CA ANZ has spoken to Andrew Leigh’s office and is willing to work with them ahead of the next federal election.
“Today’s speech and accompanying fact sheet are light on specifics for a legitimate structure used widely for business, personal investment and family purposes,” Mr Croker said.
“Accountants and their clients seek certainty, particularly when new policies impact existing structures established in accordance with laws now described by those who enacted them as unfair.”
Mr Croker highlighted a number of emerging questions about Labor’s proposed model, including addressing the potential for over-taxation, 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.
Accodex CEO Chris Hooper also told Accountants Daily that the Labor party should review what unintended consequences could come as a result of implementing this tax.
“Trusts are used primarily as a means of asset protection and distributing the tax burden across the household,” Mr Hooper said. “The Labor party would be wise to consult with the tax profession to assess any unintended consequences of this path.”
Mid-tier accounting firm BDO also responded to Labor’s proposal with tax partner Mark Molesworth expressing concern over the implementation of the policy.
“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,” Mr Molesworth 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.
In comparison, Mr Molesworth said that a husband and wife, each of whom is a plumber, carry on business through a discretionary trust and earn a net profit of $140,000 resulting, in aggregate, $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.”