The small business community has hit back at the idea the Labor Party could propose changes to tax arrangements for family trusts, while tax professionals have raised a number of complications that could emerge if the system is changed.
Opposition Leader Bill Shorten has been foreshadowing the release of Labor’s tax policy platform, promising to tackle inequality in Australia and leaving the option open to change the game on how the nation’s discretionary trust structures, which are used by a significant number of small businesses, are used.
While it’s not clear at this stage what the Labor party will propose to change, Shorten responded to questions about trusts on the ABC’s Insiders program on Sunday by saying that while he believes the family trust structure is legally sound, he is focused on creating “one tax structure for all”.
However, small business groups say tinkering with family trust arrangements could create significant cost pressures for SMEs, both in terms of planning time and potential lost benefits for small business operators who could lose the ability control the distribution of income and capital gains through their trust arrangements.
Estimates from The Tax Institute suggest that while there is a perception that it is large taxpayers who favour trust arrangements, 700,000 of the 823,000 family trust structures in operation in Australia in 2015 were for entities with income of less than $10 million.
Statistics from the Australian Taxation Office suggest the construction industry is the most prevalent user of the structure, with more than 60,000 trusts in operation in the 2014-15 financial year, followed by professional services, at 58,000, and financial services, at 57,000.
Council of Small Business Australia chief executive Peter Strong says current conversations from his member base on this issue often come back to the reflection that: “the only people that use family trusts are small businesses”, and that Labor has not done enough to show the productivity gains of changing the rules.
“There’s two ways of looking at this issue: there’s the time cost of any changes, and the actual cost,” he says.
Strong says any shift of the goal posts would require small business owners to review their tax arrangements and work out whether trust structures are best for them. This would involve both significant research and the engagement of accountants and lawyers who created the trusts in the first place.
“There’s going to be in some cases family meetings, there’s trips to the accountant, there’s reading up on the changes … all this takes the focus right off the business,” he says.
However, there has been a push in some sectors to review the tax concessions afforded by family trust structures. A report published this month by think tank The Australia Institute concluded that given an estimated $342 billion of revenue run through family trusts comes from businesses — amounting to 21.6% of the total $3 trillion asset pool held in trusts — it’s time to review any revenue that could be recouped through updates to the system.
The Tax Institute highlights the complexity of the current system and warns any changes could have unintended consequences. A spokesperson for the Institute told SmartCompany this morning that if Labor plans to make changes to individuals’ marginal income tax rates, this could actually increase the attractiveness of family trust structures for businesses.
Then there’s the suggestion that any new policies would have to be road-tested against the many different arrangements that exist in the range of discretionary trust structures to ensure nobody is disadvantaged.
“For a start, there are a myriad number of different types of trusts and this treatment would not be appropriate in all cases. Laws would need to be carefully crafted to ensure that there are appropriate carve-outs for trusts that are recognised as having legitimate purposes, such as genuine charitable trusts,” the spokesperson said.
Labor is expected to release its tax platform in the next week, and is already foreshadowing a “scare campaign” from the government, with shadow treasurer Chris Bowen telling ABC radio this morning tax arrangements will have to “keep up” with society, reports AAP.