Half of the small businesses run through family trusts earn less than $74,700 a year, yet all would face a minimum tax of 30 percent under the government’s planned changes, Australia’s peak business group has told a Senate inquiry.
Australian Chamber of Commerce and Industry (ACCI) CEO Andrew McKellar told the Senate Economics Legislation Committee that the tax reforms would discourage people from establishing, investing in and operating businesses, particularly small business owners who are not considered “high wealth individuals.”
The government said the new tax rates would prevent people from paying less tax than wage earners by distributing income among relatives who are subject to lower tax rates.
Under the government’s plan, a couple sharing $161,000 from their trust would pay about $48,300 in tax instead of $29,300, an increase of almost 65 percent.
McKellar said the chamber’s own survey found 39 percent of business owners paid themselves less than $40,000 a year.
Related Stories
Challenges in Coping with Proposed Tax Reforms
To cope with the proposed tax changes, trusts can restructure their businesses as companies or lock in fixed income shares for named family members. Both options can incur stamp duty, a state tax on property transfers.
The chamber’s submission called it a “postcode lottery.” It estimated that stamp duty on the transfer of a $1 million business property as part of a restructuring would range from about $38,000 in Queensland to $55,000 in Victoria.
The Australian Capital Territory, meanwhile, charges no duty on commercial properties valued below $2.1 million.
Once advice and other costs are added, a small business that owns its premises would likely pay more than $100,000 to restructure, the chamber says, which for many “is likely to exceed any income they receive in a year.”
ACCI chief economist Peter Grist said New South Wales had indicated it would waive duty for trusts that lock in fixed income shares, but not for those that restructure into companies.
He added that Victoria had just announced it would waive duty for both, while Western Australia had yet to decide.
“In a sign of the chaotic approach to tax reform, some states will be charging, and some not, and some conditionally,” McKellar said. “The new trust tax will turn into a double tax for many.”
Family Business Association Chief Executive Catherine Sayer questioned why many family businesses would pay more as a trust than as a company.
“Thirty percent is the proposed minimum tax. Companies pay 25 percent. We can’t see the fairness in that,” she said.
ACCI Calls for Proposed Tax Changes to Be Scrapped
The chamber wants the proposed changes rejected outright, with McKellar describing the tax as “an unprovoked assault” on small businesses.
However, committee chair and Labor Senator Lisa Darmanin argued that the reforms would have a limited impact, affecting an estimated 210,000 to 238,000 small businesses out of 2.7 million, or fewer than 10 percent.
“I think it is important to think about it within the context in which it operates in terms of the broader landscape of small businesses,” she said.
“I stand by the language that I’ve used,” McKellar replied, arguing that small businesses across the country were already facing mounting regulatory and compliance obligations and extremely difficult economic conditions.
