Trust Changes

Canada is making some changes effecting small businesses

Small businesses wary of new income-splitting rules in 2017 federal budget

How likely are these changes to come to Australia and impact the discretionary trusts.

 

High chance I think

 

Zero.
Canada like the USA have a system where joint filing is allowed and it can smooth income between spouses. (ie one not working, other does). Australia doesnt have that system other than through partnerships and trusts and business income. And then it has other limits. Canada are removing / limiting that joint filing issue.

Shortens trust taxation issue has already received a good critique by the ATO Comissioner. He agrees as I do that its a massive law rewrite. Wont be easy as numerous Govt prior to the current one have tried to do same and failed. I can recall even Keating had a crack.

Increasingly taxation seems to be moving toa minimum tax approach. This affects multinationals and even seems to be flowing down to mum and dad taxpayers so all pay a share of taxes. We can expect more policy change that impacts those who seem to pay too little.

 

Don't you think if many prior governments tried it is a pain point which will eventually be fixed?

i think many mum n dad investors use discretionary trusts to avoid paying tax. why would you think policy changes won't touch it especially when ATO is targeting individual tax payers as well

 

Discretionary trusts don't avoid tax. In fact discretionary trusts dont even pay income tax unless they make a serious error. Disc trusts are required by tax law to distribute to beneficiaries who pay tax. Saying its tax avoidance is like suggesting a company avoids tax as it pays a lower rate that an individual. Discretionary trusts are recognised under common law as a taxpayer. Change the laws and then taxation of trusts can change. In some respects the ALP policy makes some sense so that a minimum tax rate approach to the beneficiary is taken. eg a minimum tax rate of 30%. So you cant use a trust to access a rate less than 30%.

Trusts predate companies in law by hundreds of years. Companies are a modern form of tax avoidance - Literally. Companies are recognised by statute but trusts exist under common law principles rather than an Act.

There is likely to be further debate surrounding this issue as the extent of change needed is extensive. Massive law rewrite is needed and not all trusts are to be affected so two layers of the same laws are needed. Even Howard / Costello struggled with getting tax reform completed and they had a majority in both houses. Remains to be seen if the voters entrust the ALP with a majority in not just one house but both.

 

Regardless of what the ATO commissioner thinks a determined Government with a strong majority will do what it wants. Since when has common sense and complexity stopped Governments legislating changes. And Shorten will be very emboldened to proceed with the proposed Trust changes given bugger all recent public reaction if they win a majority in the next election.

The difference in the past was lack of Government resolve to really do much about trusts. However what has changes is that Populism and inequality has reached fever pitch with the voting public. I might be wrong but I think a Shorten led Labor Government will go all out to implement the policies they're taking to the next election.

Given our specific circumstances as retirees and only us as beneficiaries nowadays our Disc Trust no longer adds any advantage over owning assets equally split across own names and SMSF. Fortunately a large portion of Trust assets were moved into the SMSF under the generous old rules. So regardless of whether the Trust changes ever become law I've started the process of progressively moving assets to own names and SMSF over a few years to keep CGT minimal. Any small CGT will be somewhat offset by not having to pay related accounting / legal fees over the remainder of our lifetime.

SMSF legislative risk is a big enough headache without having to deal with increased risk of legislative risk going forward with Disc Trusts as well. Passive investment trusts (which is what we have) as opposed to those genuinely running a business are likely to be at increased risk in the future I would speculate.

 

A SMSF cant be involved with a discretionary trust and yes it can be wise to shift towards a SMSF but thats a super issue (0% tax rate is the common target) and not a failure of a disc trust. There will be still significant benefits using a disc trust under the proposed ALP plan. Not all trusts are affected by the proposals either.

I agree on the passive v's active issues. There can be significant asset protection benefits from using a separate entity to a trading business. The tax issues are just a part of a comprehensive and personal family (?) plan that should incorporate legal, tax and financial issues. Rationalising costs and structure as one approaches retirement should always be considered. Having a SMSF trust v's a family trust needs review in every case.

 

How dare people be asked to pay their taxes.

 

the mentioning of trusts by ALP is proof enough that Shorten thinks its a tax avoidance vehicle.

 

How dare we expect Governments to spend our taxes wisely?

IMHO they haven't done it for the last 117 years in this country - can't see that changing in the next 117 years!!!

 

I'm going to stop paying tax because the govt hasn't spent it like I want.

 

It is

 

Trusts are a tax saving vehicle. Governments should try to tax us as much as they can and we should try to avoid paying it as much as possible.

 

Its scares me when Shorten thinks

 

agreed

the definition of "fair share" keeps changing though which makes it harder to plan ahead

 

Trusts dont need to be a tax saving vehicle.
1. Unit trusts
2. Pooled Super Trust
3. Fixed Trusts for fixed entitlement issues (rights)
4. Public Trading Trusts
5. MIS
6. Land Tax Unit Trust where SMSF has interest
7. Widely Held Trust
8. Some Hybrid Trusts reflect non tax outcomes
9. Class Discretionary Trusts in many instances
......I could go on.

If a DT distributes to a company does that save tax ? Or is the tax inevitable at the company rate. In fact the tax rate may be 30% instead of 27.5%...More tax can be payable.

As a tax practitioner its vital that we use the tax laws that others in Govt write so that our clients pay not one cents more or less tax than the laws say. Its not avoidance to do as you are told. I think Kerry Packer even bragged he did this as the Govt didnt spend its tax revenue very well.

 

That's your decision.

Until they spend our taxes WISELY (eg the postal survey is a complete waste of time and taxpayer $'s), I am going to do everything in my power to legally minimise any taxes I have to pay.

Being doing it for 40+ years and don't see that changing soon .

 

So once you decide your taxes are spent wisely you will leave a tip?

 

I would think that the thing that needs immediate focus is not trusts but changing the super system so that employers remit super contributions the same way and time as all wages. Too many employers are thieves. Thats right - Its theft and nobody is doing jack. The ATO are meant to regulate it and arent. The system is broken and should be fixed. Now. Not next month.

The ATO have revealed that ordinary workers are being underpaid $2.8billion per year.
Tax Office reveals size of underpayment of super for the first time

Thats straight out of workers wallets. And reduces tax revenue by $420 million a year.

If the ATO acted immediately they could recoup BILLIONS in uncollected taxes from these bandit employers. If they are company Directors they can be held personally liable in almost every instance by issuing an A4 sized piece of paper printed on a computer.

Directors Penalty Notices .... If you are an employer who owes workers super you may need to read the above article.

 

New laws announced today includes measures to:

• Require superannuation funds to report contributions received more frequently, at least monthly, to the ATO. This will enable the ATO to identify non-compliance and take prompt action;
• Bring payroll reporting into the 21st century through the rollout of Single Touch Payroll (STP). Employers with 20 or more employees will transition to STP from 1 July 2018 with smaller employers coming on board from 1 July 2019. This will reduce the regulatory burden on business and transform compliance by aligning payroll functions with regular reporting of taxation and superannuation obligations;
• Improve the effectiveness of the ATO’s recovery powers, including strengthening director penalty notices and use of security bonds for high-risk employers, to ensure that unpaid superannuation is better collected by the ATO and paid to employees’ super accounts; and
• Give the ATO the ability to seek court-ordered penalties in the most egregious cases of non-payment, including employers who are repeatedly caught but fail to pay superannuation guarantee liabilities.

Its still too soft.