Small businesses face a potential tax burden of up to 77 per cent under Labor’s proposed new tax on discretionary trusts, a leading tax expert says.
Professor Robert Breunig, the director of the Australian National University’s Tax and Transfer Policy Institute, said the businesses that set up bucket companies to make trust distributions face a big tax burden under Labor’s plan for a minimum 30 per cent tax on distributions.
Under the Federal Government’s proposals, these discretionary trusts also faced paying a maximum marginal tax rate of 47 per cent on top of the minimum 30 per cent tax because they would be unable to claim franking credits or tax breaks for company tax already paid.
“This is definitely an issue and it’s a large part of the kerfuffle around the legislation,” he told The Nightly.
“It could be even worse than that, it could be 30 per cent plus 47 per cent in some cases.”
Labor is proposing to levy a 30 per cent tax on distributions to beneficiaries of a discretionary trust that aren’t individuals or non-profit entities like charities.
“If you distribute to a company, you cannot pass those credits on to a company so that’s where the tax risks being pretty onerous,” Professor Breunig said.
“They’re trying to crack down on a small number of people who are using these structures to really avoid lots and lots of tax and it’s unfair because it’s not available to wage and salary earners.”
Discretionary trusts can avoid the new minimum 30 per cent tax on trust incomes proposed to come into effect on July 1, 2028 if they restructured to become a fixed trust where distributions to beneficiaries can’t be altered.
The NSW and West Australian governments are offering stamp duty relief if discretionary trusts restructured to become an excluded election trust.
But Professor Breunig said this relief would be useless for businesses having to restructure a bucket company out of a trust.
“It’s only for turning your discretionary into a fixed trust, it’s not for taking your business outside the trust and setting up a new business - nobody’s waiving stamp duties on that,” he said.
Shadow treasurer Tim Wilson suggested small businesses conservatively faced a 60 per cent tax bill.
“The idea that the Albanese Government thinks small business needs 60 per cent taxes right now is outrageous,” he told reporters in Melbourne on Monday.
“It’s because the Albanese Government cannot control its spending addiction that it continues to stoke higher taxes and target small business specifically.”
One Nation leader Pauline Hanson on Monday announced that should her party form the next government, it would repeal Labor’s proposed May Budget taxes on discretionary trusts that are yet to get through the Senate.
Treasurer Jim Chalmers is also proposing a minimum 30 per cent capital gains tax on trusts from July 21, 2027, but with rollover relief for discretionary trusts that restructured.
“Dr Jim Chalmers is experimenting on the Australian economy, and everyday Australians are his guinea pigs,” Senator Pauline Hanson said.
“He’s playing with your home, your rent, your business and your savings. When his experiments fail, Australians will pay dearly.”
The Reserve Bank of Australia’s ban on surcharge fees, or the costs unrelated to processing a transaction, is creating problems for small business, with Australian Chamber of Commerce and Industry chief executive Andrew McKellar suggesting some could resort to offering discounts for customers paying in cash.
“This was always a false economy. It was always smoke and mirrors. So, it’s not surprising that we’re seeing these sorts of unintended consequences occurring now,” he told reporters on Monday.
“So small businesses in particular are struggling in the wake of the surcharge ban with do they have to absorb those costs, do they have to pass them on to their customers? Do they offer a discount for things like cash?”
In the wake of this surcharge ban, the Australian Taxation Office’s ban on credit card payments is now coming into effect on July 1 next year instead of December 1.
While business have to absorb the costs, Assistant Treasurer Daniel Mulino said making the tax office do so would be costly to taxpayers.
“Accepting credit card payments going on indefinitely would have very serious fiscal ramifications for the Budget and that’s why we always said there should be a transition period,” he told ABC Insiders on Sunday.
Dr Mulino was also unable to talk about the prospect of discretionary trusts paying more than 60 per cent tax.
“I don’t want to get into particular tax arrangements for particular companies because each situation is different,” he said.
“The point here is that what we’re setting is a very reasonable minimum tax.”
Nor was he able answer questions on stamp duty relief for trusts restructuring or legal compliance costs.
“It’s difficult to pin that down to particular businesses,” he said.