Shorten's Tax on Trust
Bill Shorten has announced that he intends to impose a ‘minimum tax rate’ of 30 per cent on distributions made from discretionary trusts to adult beneficiaries as an effort to ‘crackdown’ on income splitting and tax minimisation by high wealth individuals if Labor get elected.
Whilst details of the actual rules are very sketchy, if the policy was to proceed it could impart almost half of the discretionary funds in Australia (approximately 318,000 trusts or 2% of tax payers being affected). The announcement excluded farmer’s trusts, charitable trusts and disability trusts - who would be exempted from the increased tax rate.
The reasoning suggested for excluding farmer’s trusts was due to their often ‘lumpy income’, and common desire to pass on the business between generations, doesn’t hold water when compared to other small businesses. The announcement, if ultimately enacted, would be effective from 1 July 2019 and is clearly reliant on Labor being elected and forms part of Labor’s political positioning.
The proposed policy whilst headline grabbing has come under attack from a variety of sources including small business owners, given that many small businesses operate through a trust structure.
The policy, whilst bearing the banner of ‘eliminating inequality’, may in fact result in additional inequality in the tax system - as small business owners could be adversely penalised compared to PAYG remunerated individuals.
Clearly, the policy announcement has a long way to run and further details will need to be provided before any firm views can be drawn, however, such considerations will need to include the flow through of franked dividends, the impact on the imputation system, corporate beneficiaries and capital gains tax implications.
Should you have any questions in relation to the above please do not hesitate to contact your ESV engagement partner on 02 9283 1666.