It’s that time of year again where our politicians are talking about the budget and taxation reform, which isn’t surprising considering it is an election year. A policy worth discussing is Labor’s trust tax reform, which will affect how discretionary trust distributions are taxed and how they could have far reaching implications for small to medium tax payers in the event the reform becomes policy.
Labor are proposing that a flat rate of 30% tax be applied to all discretionary trust distributions. This will only affect discretionary trusts. Fixed trust (E.g. Unit trusts) will remain exempt from the minimum tax on distributions. The reform impacts the treatment of trust distributions in that currently a discretionary trust with investment income could distribute to a family member in a lower tax bracket than the primary income earner. This can be used to reduce the overall tax liability of a family group. Below is an example:
Current Trust Taxation Arrangement
As an example, the lower income earner may be in the 19% marginal tax bracket which compared to say, the primary income earner who may be in the 32.5% tax bracket. This results in a marginal tax saving of 13.5% to the overall family.
Proposed Trust Taxation Arrangement
Labors tax reform proposals would result in the same distribution incurring tax at 30% instead of 19% resulting in an additional 11% tax on the trust distribution. This results in the distribution now only performing 2.5% better than a distribution to the primary income earner a significant reduction in the tax benefit.
Although not yet law, in the event that labor secures government and passes the trust taxation reform described above there will be a significant impact to the amount of tax payable within a family group.
This change is something to consider when structuring or reviewing your financial arrangements and if you are concerned about how this might impact you feel free to call us on (07) 5413 9300.
Treasurer Josh Frydenberg criticised the proposal over Twitter, stating that it would hit “300,000 small businesses with $17 billion on new taxes on trusts”.
“Your idea of fairness is now to hit two brothers working in a small family carpentry business making $110,000 per annum between them with an extra $15,000 of tax per annum. As the Council of Small Business Australia said, [it’s] a case of Labor Party going after hardworking small business because they are a soft target,” Mr Frydenberg said in a Twitter post.
There are many Australian businesses that run their business through a trust. If labour wins the next election and passes this legislation, it would not be surprising to see many businesses consider restructuring to a company. I believe this would keep the ATO happy, as they appear take a dim view towards discretionary trusts.