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Labor proposes change to taxing discretionary trusts

Posted by Northadvisory on August 7, 2017

The Leader of the Opposition, Mr Bill Shorten, has announced that a Labor Government would introduce a standard minimum 30% tax rate for discretionary trust distributions to beneficiaries over the age of 18.

Discretionary trusts allow for trust income to be distributed on an entirely discretionary basis. This means distributions can be artificially split between different people in lower tax brackets so that the tax paid on the overall amount is much less than it would otherwise be.

Under Labor’s policy, individuals and businesses will still be able to use discretionary trusts. However, the new minimum 30% rate on distributions will make sure discretionary trusts cannot be used as a vehicle for aggressive tax minimisation. Non-discretionary trusts – such as special disability trusts, deceased states and fixed trusts – will not be affected by this change. Labor’s policy will also not apply to farm trusts and charitable trusts.

Exemptions will apply under the new arrangements, such as for people with disability, to ensure people suffering genuine hardship are not affected. The Commissioner will be given discretionary powers to manage this.

Labor says that it will consult with the ATO, Treasury and tax experts on the implementation of this policy.

Labor will also provide an additional $55m per year to the ATO to boost its current trust anti-avoidance activities. This policy has been costed by the independent Parliamentary Budget Office. It is estimated to raise $4.1b over the forward estimates to 2021/22 and $17.2b over the medium term.

Shadow Treasurer, Mr Chris Bowen, says the ATO has provided further evidence that wealthier Australians are using trusts to stay in lower tax brackets.

If you have any questions, please do not hesitate to contact us.

Martin van der Saag
Director
T: 02 9984 7774
E: martinv@northadvisory.com.au

Norman Ruan
Accountant
T: 02 9984 7774
E: normanr@northadvisory.com.au