Experts wary of suggestions trusts could be targeted in Federal Budget

Family trusts are tipped to be targeted in next month’s budget, in a move experts warn could have a significant impact on Australia’s small businesses.

Reports suggest that the Government is growing increasingly concerned with rorts by high-income earners. According to the Herald Sun, Tax Office figures shows investment earnings from high-income earners have been allocated to more than 190,000 children via trusts, to reduce the wealthy individuals’ tax bills.

The maximum amount of ‘non-work income’ – from fixed interest, shares and property, for example – that can be distributed tax-free to children has soared to $3,333 in recent years, proving advantageous for individuals with passive income.

Yasser El-Ansary, tax counsel at the Institute of Chartered Accountants in Australia, is doubtful a crackdown would occur at this budget, but warns any moves would have a significant impact on SMEs.

“Whenever you talk about family trusts you’re always going to be talking about significant sums of money,” El-Ansary told SmartCompany.

“Despite the perceptions of many, the reality is trusts are most prevalent in small businesses and primary producers.”

“In a bigger context, what you’re really talking about is 600,000 family trusts who on average would have between three and five beneficiaries.”

“Multiply those numbers you’re talking about 1.5 million to two million taxpayers, which is about one-fifth of taxpayers across Australia.”

But El-Ansary isn’t worried about an immediate crackdown.

“I think the Government has already started a pretty comprehensive study of the way family trusts are taxed,” he says.

“Shorten [Financial Services Minister Bill] has sent a clear signal that he supports the use of family trusts so I don’t feel there’s much likelihood the Federal Government will do much in this regard.”

El-Ansary adds if the task of reforming the taxation of trusts proves too difficult, or proves to not deliver the sort of transparency and simplicity outcomes that trustees are looking for, then it might be appropriate for the Government to look at overseas models – such as New Zealand – that offer appropriate safeguards and a degree of flexibility and flowthrough of income gains.

CPA Australia head Paul Drum says the Government might believe the increase in low-income tax offset has become “overly generous” to certain sections of the commmunity, but stresses it’s too early to judge without knowing the details.

“I expect that it would have a significant revenue implication given that family trusts are the preferred business and investments for most Australian small businesses,” Drum says.

“If it was decided that they would wind back the tax-free amount you can contribute to $416, like it was 20 years ago, that would have some serious financial implications for many small businesses that use family trusts.”

The report follows a quickly retracted call from Shadow Treasurer Joe Hockey to bring the taxation of trusts in line with company-tax levels.

A spokesman for Shorten this morning stood by earlier comments that family trusts are a “legitimate feature of how Australians conduct their financial affairs.”

He declined to comment on the pre-budget speculation.