Shorten’s $17.2 billion tax crack down on discretionary trusts
If you are a small business and are using a discretionary trust to manage your financial affairs, watch out. Shorten’s tax revenue raising plan may come as bad news.
In the recent Labour NSW Conference, Shorten has announced that if he gets elected, he would limit the tax-minimisation capacity of discretionary trust-holders by closing loopholes. With this plan, all discretionary trust distributions would attract a 30c on the dollar tax-payable. He claims that this has two objectives: firstly to reduce the wealth-gap disparity by increasing taxes for the wealthy and secondly to address Australia’s increasing debt, which currently is sitting at about half a trillion dollars.
The plan is expected to raise $17.2 billion in tax revenue over the next 10 years, and is the second most-ambitious plan thus far. Shorten agrees that this is a tough plan but that “our system should not be subsidising those who are already wealthy, and our budget cannot afford to.” Shorten reassures us that only 2% of taxpayers would be affected, mostly those in the upper class. The idea is to prevent tactical moves, such as when high-income parents distribute money to their low-income earning children, from bearing any tax-discounts.
‘A healthcare worker at the Nepean Hospital can’t go down to payroll and request that they split her income to reduce her tax. A hospitality worker in Blacktown doesn’t get to give herself a tax cut by moving some money into her partner’s account,’ Shorten says.
What does this mean for small businesses?
Whilst Shorten is confident that the new policy would significantly improve wealth gaps and Australia’s dwindling debt situation, many sceptics on the other hand are concerned that there are negative implications that have not been weighed in.
The biggest concern is the implications that the proposal has for small businesses. Many small businesses are built upon discretionary trusts to manage their financial affairs. Therefore critics have argued that it would be small businesses, not wealthy families that would be bearing the brunt. Treasurer Scott Morrison branded this policy as ‘an assault on small businesses.’
Shorten however states that the policy would affect 315,000 existing trusts, only 200,000 of which would be tied to a small business. With 3 million businesses, he considers this ‘a small amount.’
“This is not about small businesses, it’s about high net worth individuals,” he says.
While there is a need to address Australia’s debt problem and income disparity, it seems that more consideration is needed as to the collateral effects such a policy may bring. Small businesses are key players in powering Australia’s economic engine and thus burdening trust holders, a portion of which are businesses, may have unintended consequences.
What are your thoughts on Shorten’s proposal? Do the benefits outweigh the setbacks? Let us know by tagging us at #lawpath or @lawpath.
Tony is a legal Intern at Lawpath who is working with the contents team to provide legal insight for SMEs. With an interest in contract and business law he is currently completing his Finance and Law degree at the University of New South Wales.