The Australian, April 16, 2019
The Australian Chamber of Commerce and Industry, CPA Australia, the Council of Small Business of Australia and Commercial Asset Finance Brokers Association are leading a pushback against Mr Shorten’s attack on trusts, demanding more detail on the overhaul.
ACCI chief executive James Pearson said one of the key concerns raised with the business lobby was the crackdown on trusts, while COSBOA chief executive Peter Strong warned changes to penalty rates and the scrapping of refundable franking credits sent the wrong message to small businesses.
Head of external affairs at CPA Australia Paul Drum said there were about 350,000 small business trusts, producing a median gross income of $61,634.
“When one considers each of the Labor Party’s announced tax policies to date — taxing trust income at 30 per cent regardless of a person’s marginal rate, removing refundable franking credits, quarantining negative gearing, cutting the capital gains tax discount and capping the cost of getting professional advice — it paints a very grim picture for those trying to run a small business or invest,” he said.
Speaking in the Victorian marginal Liberal-held seat of La Trobe yesterday, Mr Shorten was forced to defend his record on small business, under pressure over his pledge to reverse penalty rate cuts and cap deductions for use of tax professionals at $3000. Labor’s policy would affect the distribution of income from discretionary trusts, with all beneficiaries of a trust over 18 taxed at a minimum rate of 30 per cent — a level that is higher than the 25 per cent tax rate applying to small businesses with a turnover of up to $50 million from 2021-22.
Mr Pearson said the higher rate of taxation in trusts had triggered concerns that Labor’s policy would have a “distortionary impact” and argued that further consultation was necessary to ensure it did not have “unintended consequences”.
“Our small business members have expressed concern about the proposed changes to discretionary trusts proposed by Labor,” he said.
“As Labor acknowledges in its policy statements, small businesses use discretionary trusts for a range of legitimate reasons, such as business succession and asset protection.
“And the concern is that these legitimate purposes may be negatively impacted by the changes. In particular, family businesses use discretionary trusts to distribute income amongst the family. This reflects the reality that a family business is often a joint effort.”
According to Australian Taxation Office data, there were 690,553 discretionary trusts in Australia out of a total of 874,874 trusts at the end of June 2017. Mr Drum argued that a small-business owner could pay themselves a salary to step around Labor’s proposed 30 per cent distributions tax, but suggested most would not be able to afford it and that it would tip them into further “complex compliance obligations”.
“Under Labor’s proposals, where an individual receives income of $61,000 from a small business operated through a trust, they will have to pay $18,300 in income tax compared to $11,372 if they were taxed as a sole trader,” he said.
He also warned that low-income beneficiaries in trusts would be hit by other Labor tax policies, including the plan to scrap refundable tax credits on shares, limit negative gearing to new dwellings and halve the capital gains tax discount.
Mr Drum said the 350,000 small business trusts generated $217bn in economic activity.
But Labor Treasury spokesman Chris Bowen argued that Labor’s reforms to the taxation of discretionary trusts was targeted at reducing tax minimisation and income splitting. He said the overhaul would not affect 98 per cent of taxpayers.
“If a sole trader is running a business through a discretionary trust, he can pay himself a wage and avoid the minimum 30 per cent distributions tax rate,” he said.
“Small businesses can pay wages to employees in the normal way. What Labor’s reforms will do is make it more difficult for family trusts to make distributions to those not engaged in the business, by cracking down on income splitting.
“Many of these self-classifying discretionary trusts will be not be ‘active’ businesses — rather, many will be doctors, lawyers, surgeons, builders, accountants and investment bankers who are income-splitting income through their trust to beneficiaries.’’
Mr Strong said the crackdown on trusts was accompanied by Labor plans to reverse penalty rate cuts for workers in retail, fast food, pharmacy and hospital sectors as well as the scrapping of refundable franking credits.
“It doesn’t send a message to the people who have done the right thing,” he said. “The issue about the trusts from our point of view is that trusts are used by 95 per cent of people for the right reasons. It’s used to protect assets and distribute income.’’
Mr Shorten yesterday said that Labor was committed to small business, arguing it would support a reduction in the corporate rate to 25 per cent for companies with a turnover of up to $50m and allow businesses to deduct 20 per cent of any new eligible asset worth more than $20,000.
“We’ve got a lot of good news for small business,” he said. “I get that small business is hearing all sorts of, you know, scary and mad things from the government. But I just want to reassure small business — we’re the equal on tax; we’re better on the deductibility for investment. And when it comes to wages, we get that you have to implement these things in a modest and meaningful way.”
Commercial Asset Finance Brokers Association president David Gandolfo yesterday warned that Labor’s discretionary trust overhaul amounted to a “massive tax hike”.
“There would be people in the business who would ultimately fall below the tax threshold or who would be on the lowest tax rate so their total tax rate wouldn’t be 30 per cent,’’ he said. “By taxing them at a headline 30 per cent, you are giving them a massive tax increase … higher than the tax rate that should apply.’’