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Change looms on trust tax law plan

A PLAN to tax discretionary trusts as companies is likely to be modified as the Federal Government faces rising opposition to the proposal.

A spokeswoman for Federal Treasurer Peter Costello said the Government was considering submissions it had received on its exposure draft of the proposed law and had not made any firm decisions yet.

The new law, due to come in on July 1, proposes to apply the 30 per cent company tax rate to discretionary trusts and crack down on tax avoidance.

The law proposes taxing unrealised gains to crack down on people distributing tax-free income through trusts.

An Australian Tax Office spokesman said some high wealth individuals with rapidly appreciating assets borrowed against those assets and distributed the funds through the trust, effectively making a tax-free gain from the asset without having to sell it.

The Government’s move has angered small businesses and farmers that use discretionary trusts because they provide a structure allowing asset protection and easy business succession.

They fear they will be taxed on funds they will never receive.

The National Party has come out in defence of farmers and called on Mr Costello to reconsider the proposed law. A number of Liberal backbenchers also oppose the move.

Mr Costello was reportedly involved in a heated conversation recently with a National Party backbencher, over the law.

The Government’s exposure draft of the proposed law has drawn about 60 submissions that have thrown up a number of different ideas to beat the unrealised gains problems.

Combined Small Business Associations of Australia chief executive Rob Bastian said small business was concerned about the method the Government was choosing to clean up the rorts.

“This is not the only way to stop the rorts. This seems to be an unnecessarily onerous way of taxing trusts,” Mr Bastian said.

“We’re hoping the Coalition will reflect on the effect on its ‘much loved small business’ but I fear the senior Liberals are digging in.

Mr Bastian said the Government had a chance to go back to basics and look at setting up an alternative legal structure for small businesses.

He said Treasury was trying to squeeze small businesses into company structures.

“The major problem with the way Treasury is pushing things is that 80 per cent of small businesses are not incorporated and don’t want to be,” Mr Bastian said.

“We’re just glad it didn’t land before Christmas which was the original plan.”

CPA Australian’s senior tax counsel Paul Drum said he was not sure what revenue leakage the Government was trying to catch with the legislation.

“We’re not sure they know either because they are taking a drag net approach,” Mr Drum said.

“When you try and capture everything, you end up with exceptionally high compliance costs. If the costs outweigh the revenue leakage, don’t do it.”

Mr Drum said there were 453,000 trust returns lodged with the ATO in 1997-98 and 450,000 of those were in the small to medium-sized enterprise category.

“The first thing, if the rules come in, will be to find out if it applies to them,” he said.

“That means an army of lawyers to find out who the law applies to – the first compliance costs.

“Then you have to find out how to deal with it if the rules affect you.”

The Government has carved out fixed trusts from its proposed legislation, because such structures are used by the big US pension funds it is trying to attract.

Fixed trusts will not be taxed at the entity level, so the pension funds can invest their money here and take their returns out without paying tax on the deal.

Mr Drum said the Government’s plan to tax discretionary trusts at the entity level would encourage the retention of income, which would work well for high wealth individuals.

Income not distributed from discretionary trusts is taxed at 48.5 per cent. Under the proposed law, it will be taxed at 30 per cent.

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