In recent years, there’s been an explosion in the use of discretionary trusts. According to The Australian Institute, these trusts hold more than $3.1 trillion combined.
What’s a family trust?
A family trust, formally known as a discretionary trust, is usually established to protect the family group’s assets from the liabilities, pass family assets to future generations, and minimise tax. Here’s how it works: in a family trust, the trustee–usually mum or dad–decide on the distribution to beneficiaries (family) of income earned by the trust so that minimal tax is paid each year.
Why the proposed crackdown?
As reported by the Sydney Morning Herald, Sky News and ABC Online earlier this week, Opposition Leader Bill Shorten has pledged to crack down on wealthy Australians that use family trust distributions to avoid paying income tax.
The policy aims to target the top two percent of Australia’s highest income earners who use discretionary trusts to split up earnings among other lower-earning family members to reduce their personal tax bill.
Shorten said that his policy will prevent billions of dollars leaking from the federal budget, adding $4.1 billion to commonwealth coffers over four years and $17.2 billion over a decade.
The Liberal Party has branded the proposal “an attack on small businesses,” warning that it will impact every business – including 200,000 small businesses.
Although Labor insists that it’s not targeting small business, the Party has acknowledged that around two-thirds of the affected trusts, 200,000 of 315,000, will belong to families running small businesses. These businesses will be stung with a minimum of 30 percent tax on discretionary payments to trustees.
According to The Sydney Morning Herald, the small business lobby has also cautiously criticised the idea. Australian Small Business and Family Enterprise Ombudsman Kate Carnell told Sky News it was “one of those policies that has good bits and bad bits,” but warned many families used trusts as “a reasonable and a sensible way to manage their business.”
Will my business be affected?
If your small business is employing a family member, their wage will be taxed at the normal rate and they can claim the tax-free threshold.
It’s also worth noting that farm trusts, charitable trusts, and those set up to manage deceased estates will be exempt.
While this policy threatens to negatively impact some small businesses, there are still some legitimate uses for family trusts, including asset protection and succession planning.
Talk to us
To understand the full extent of the proposed changes, or to optimise your tax position, contact us today.