Opposition Leader Bill Shorten has this year suggested that a 30% tax rate on distributions from family trusts would “make the tax system fairer” – and, according to the ABC; the move could potentially raise $17 billion in revenue over the next 10 years.
A report published by The Australia Institute (TIA) earlier in the year published figures from the Australian Taxation Office showing that Australia holds 823,448 trusts, with assets worth $3.1 trillion, and with total business income earnings of $349.2 billion.
David Richardson, senior research fellow at The Australia Institute described these figures as “staggering” – although realistically, these numbers may not come as a surprise to finance professionals, as according to TAI’s report; “putting money into self-managed super funds had been a popular strategy for tax minimizers, avoiders and estate planners”.
Joanne Wynne, Principal at RSM supports this notion, writing that trusts are “a widely-used tool to reduce income tax, protect assets and provide for future generations of families”.
Although these figures may not astound professionals providing accounting and financial advice to the Australian public; many Australians are unlikely aware of the national proclivity towards forming and utilising trusts in order to avoid tax.
The Australia Institute’s July study goes on to state that from the national accounts data for the year 2014-15 (the last year for which data was available) – “21.6% of Australia’s national income was run through a trust”. The notable growth in the forming of trusts (especially Discretionary trusts) in Australia over the past 20 years, can be seen in the below chart taken from the report.
With this information in mind, the fact that $3.1 trillion worth of Australian assets are found in trusts is less surprising.
Wynne, in her AccountantsDaily column – suggests that “it would be a mistake to categorise trusts as tax havens for the wealthy”; noting that trusts are often implemented by families wherein one adult is the primary/only income-earner, and that “the trust structure helps lower the tax burden, preserving more of that worker’s income to support the rest of the family”.
The Australia Institute’s July study charts the Australian industries within which trusts are often utilised – although it is important to recognise that the below table only includes information on 403,600 trusts; implying that 51% of trusts are not assigned to any particular industry.
The data is still noteworthy, as “generally it seems that the industries that include a large number of small operators are likely to utilise trust arrangements”.
It should be included here that TAI’s report, using ABS data – states that “virtually all wealth held in all private trusts is by the 20% wealthiest households who hold an average $123,100 in private trusts…the top 20% account for 95% of the value of all wealth held in trusts”.
In short, according to the report; “an examination of who is using trusts and who benefits from trusts shows they are heavily biased towards the very rich… people with taxable incomes of $500,000 or more account [for] just 0.43% of the population but 51% of all trust distributions”.
According to Wynne; when a SME operates via a family trust, that family puts their own assets into the business as equity or collateral – which is often seen as quite a risky move. Thus, the ability to spread any profits among family members is “arguably, a just reward in exchange for that risk”. On top of this, one benefit in “running a business through a company or trust structure [is that it] can provide some liability protection in case there is an issue”.
Whilst small businesses are in terms of taxation safe with regard to operating through trusts (at present, at least) Fortis Accounting Partners suggests that if the 30% tax rate on family trusts does come into play, it will bring with it a potential need for small businesses to look at restructuring.
There are many options worth considering when it comes to restructuring your business to avoid paying more tax than is necessary, such as switching to a corporate entity and thus facing a tax rate of 27.5% – which may well drop down to 25% if the potential 30% family trust tax is to come into effect.
If you are currently running a business through a trust; we strongly suggest getting in touch with the team here at Fortis Accounting Partners so that we can discuss your options and manage any changes that may be necessary.
Whilst there has been a historically negative (or at least skeptical and wary) view of the use of trusts within Australia, this has largely come about through misunderstanding, which has led many members of the public to believe that trusts are simply tax-avoidance tools utilised primarily by the uber-rich.
With that said, UNSW’s Associate Professor of Taxation Dale Boccabella, states that “it is hard to imagine anyone would set up a trust unless there was another legitimate reason or there were tax advantages of at least one per cent of income.” TAI’s report seems to agree with this notion, concluding that “the main attraction of trusts seems to be tax avoidance”.
Boccabella has estimated that as things stand, the ATO’s loss of revenue could be as high as $2 billion per annum.
TAI’s report adds that a “very conservative” estimate would be that the foregone revenue may be $3.5 billion, (1% of the overall business income received by trusts). Based on the ATO’s figures relating to the number of Australian taxpayers – “tax avoidance through trusts would cost each taxpayer an average of $202 per annum on Boccabella’s figures and $354 per taxpayer if the one per cent assumption is correct”.
Of course, it is not all doom and gloom – and Fortis is by no means suggesting that the use of trusts; even in the context of looking to pay less tax, should be stopped – or even frowned upon.
Wynne provides a relevant example of “a small business or tradesperson with a $200,000 income [who] would normally pay a high personal income tax rate”. In the event that this tradesperson has a non-working spouse, and they are concerned about the level of tax that they are paying – running their business through a trust would allow the breadwinner’s income to be spread between family members, resulting in slightly less tax being paid.
This is then money that can go towards anything from paying the family mortgage, to buying groceries. Regardless of where it goes, this is extra money being injected into the Australian economy.
Peter Strong, a Council of Small Business Australia (COSBOA) representative spoke with the ABC’s RN program on 31 July; urging the government to “go get them in another way, don’t punish everybody”. RSM Australia’s Joanne Wynne seems to hold a similar objection to raising the family trust tax rate to 30%; stating in AccountantsDaily that “by discouraging small businesses from using trusts, governments provide no incentive for people to work hard and do well”.
Fortis Accounting Partners urges all clients with Australian businesses operating through a trust to keep a close eye on the opposition government’s threat to tax family trusts at a higher rate. If a tax on family trusts does come into play, we strongly encourage business owners to get in touch with us to discuss ways that we can restructure your business in order to both protect family assets and wherever possible; minimise tax being paid.
You can get in touch with the Fortis Accounting Partners & Fortis Financial Planning team on 02 9267 0108, or via info@exemplary-financial.flywheelsites.com.
Sources:
- AccountantsDaily – “How small businesses will be affected by changes to family trusts tax” 16/11/2017
http://bit.ly/2ivbeMT - ABC – “Trusts and tax minimisation explained” 28/07/2017
http://ab.co/2wfV26J - The Australia Institute – “Trusts and tax avoidance” July 2017
http://bit.ly/2z8yWoJ - ABC – “Bill Shorten pledges to impose 30pc tax rate on family trust distributions” 30/07/2017
http://ab.co/2mLHEHT
