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Bill Shorten’s announcement to lob a 30 per cent tax on trust distributions shocked me. It speaks to either a lack of understanding of the tax system, or perhaps its political grandstanding.
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Trusts and the tale of three households
31 July 2017
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Maybe I’m shocked because I personally have my own family trusts, and am bringing my own personal biases to the story. Either way, allow me to tear strips off of it for the amusement of Accountant’s Daily readers.
An anomaly exists in the Australian Taxation System with respect to how our marginal tax rates interact across the family group. Let’s say you have two identical households with gross income of $100,000. Family A has one primary income earner making $100,000 a year. Family B has two people working 20 hours a week, earning $50,000 each. The two households are identical with respect to economic contribution and income. Yet for some reason in Australia Family A pays $26,632 in tax, while Family B $17,094 in taxes. Yet shorten wants to talk about inequality?
The dependent spouse tax offset was designed to mitigate this, but it has been scaled right back over the last decade. The last attempt of trying to equalise the tax burden across households is the family trust. Prudent tax planning would recommend Family A establishes a family trust to put all savings and investments and distribute the taxable income to the dependent spouse.
Shorten told ABC, that “It's not about small business, it's about high-net-worth individuals."
Now let’s look at Family C, with business operating through a trust. It made a net profit of $100,000 and would pay $30,000 in tax, versus the $17,094 if it were distributed across the two householders. Now we’re accountants, so our job would be to help our clients navigate around this issue. We could restructure the business as a partnership, except we would then expose our clients' personal assets. We could set up a company and put the householders on salary of $50,000 each, but cash flow is so volatile that may choke the business with PAYG, superannuation and payroll commitments.
Moreover, there hasn’t been much talk of the role of imputation credits with respect to this arrangement. In the aforementioned small business scenario even if the trust had to pay a 30 per cent tax, it would then be distributed to the two householders with an imputation credit, and would then receive a $6,453 refund. Even if you took a super wealthy example, with distributable income of $1,000,000 the net effect would still be the same.
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At best, this tax with the inclusion of refundable imputation credits nets the federal government a nil return, yet increases the administrative burden on the tax office and the private sector. At worst, with no imputation credit, it is a heinous tax that disadvantages small businesses across the country.
Perhaps a consultation with some tax accountants could have prevented such an ill conceived piece of policy coming into existence.
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