A small business lobbyist says the Federal Government must ensure any budget crackdown on the use of trusts by wealthy families does not hurt small, family businesses.
Peter Strong, executive director of the Council of Small Business of Australia, says cracking down on the use of family trusts will be “another nail in the coffin” for small businesses unless it is limited to the “filthy rich”.
“If someone uses family trusts as a way of looking after their family’s economic health, that’s fine. But leave the everyday workers alone,” he says.
Strong’s comments come in light of recent news that Treasurer Wayne Swan has indicated a budget crackdown on the use of trusts by wealthy families to minimise their tax liabilities through assigning income to their children.
New figures from the Australian Taxation Office reveal high earners allocate investment earnings to almost 200,000 children via trusts to dramatically reduce their own tax bills.
There are more than 600,000 family trusts in Australia, which can be used to distribute up to $3,333 a year in non-work income to each child tax-free.
With just two weeks left until the Federal Budget is announced, Swan has hinted the rules will be tightened to miminise exploitation of the loophole.
The Government is desperate to find ways to raise extra revenue in order to honour its promise to bring the budget back into surplus in 2012-13.
Swan said in a statement the issue of family trusts was dealt with extensively in the Henry Tax Review, which recommended that tax rules be rewritten to reduce the complexity and uncertainty.
“But what [the report] didn’t deal with was… the use of the low income tax offset by wealthy people,” Swan said.
“What I always will judge these issues by is what is best for lower and middle income-earning Australian families. And if others are using artificial means to avoid their tax, then we should do something about that.”
Assistant Treasurer Bill Shorten is expected to release proposed legislation after the budget, which will ensure trusts are not taxed as companies.
One option could be to means-test children’s access to the tax-free threshold against their parents’ wealth.
However, the ATO would have to assess how an extended family’s ownership of a business through a trust would affect the entitlement of a particular child.
Institute of Chartered Accountants tax counsel Yasser El-Ansary says trusts are the “vehicle of choice” for small businesses because they are flexible, transparent and can transfer wealth from one generation to another “to help build the nation’s prosperity”.
Opposition treasury spokesman Joe Hockey recently suggested a tightening of the rules surrounding trusts, but quickly backpedalled after the intervention of the National Party.
