In the lead up to the federal election, whether you follow politics or not, it is likely that you have heard a few of the legislative changes that the political parties are intending to introduce should they win the election. The changes to the taxation of Discretionary Trust distributions are one of the many changes that the Australian Labor Party (Labor) is looking to introduce under their “A Fairer Tax System For All Australians” reform. Given Labor is tipped to win the election we thought it would be relevant to go through how this tax reform may impact you.
What is the change?
Discretionary Trusts are a type of structure used by many Australians with over 642,000 Discretionary Trusts currently in Australia today. Discretionary Trusts are typically chosen for their asset protection purposes and the ability to distribute profit across multiple beneficiaries, for example, various family members.
Currently, as an individual, you can receive a taxable trust distribution of up to $18,200 (the tax-free threshold) and pay no tax.
If elected, Labor intend to introduce legislation to have a minimum of 30% tax imposed on Discretionary Trust distributions to those people aged over 18 from 1 July 2019.
Who will this impact?
If passed, this change may impact anyone who has a Discretionary Trust and distributes to individuals. If your current marginal tax rate is higher than 30% (e.g. your taxable income is over $37,000), there won’t be any change for you. This change is mainly designed to prohibit distributions being made to individuals on a lower tax bracket.
Who will not be impacted?
Labor has suggested that some of the Trust structures that will not be impacted include:
- Charitable Trusts
- Testamentary Trusts (Deceased Estates)
- Fixed Unit Trusts
- Special Disability Trusts
- Farm Trusts
- Cash Management Unit Trusts
What will the change cost in terms of tax?
Should Labor win the election and the policy be passed as legislation, below is an example of the impact the proposed policy will have from a tax perspective.
- Current legislation
Bill owns a plumbing business which trades out of the Smith Family Trust. This year the business made a profit of $30,000.
Bill decides to distribute this profit equally between his two adult children that currently do not work or have any investment income.
The $15,000 distributed to each child results in a nil tax liability. This is due to the taxable distribution being under the $18,200 tax-free threshold.
- Proposed tax policy
The trust distribution of $15,000 to each child will result in a tax liability of $4,500 (30% of the distribution amount), resulting in an overall tax liability of $9,000 for the total profit distribution.
The changes Labor are proposing are significant and will impact our current investment landscape. The devil will be in the details and there will be a lot of pro-active planning opportunities available and required, which BLG Business Advisers will be sure to communicate with you should Labor be elected. Stay a step ahead and start planning ahead today by getting in touch with our team online or by calling (02) 4229 2211.