SMALL businesses will bear the brunt of the Federal Government’s Entity Taxation Bill when it becomes law on July 1.
SMALL businesses will bear the brunt of the Federal Government’s Entity Taxation Bill when it becomes law on July 1.
The Ralph Review of Business Taxation set out to create consistent rules for the taxation of limited liability entities such as pty ltd companies, partnerships and trusts.
Instead, the Government has created a set of anti-avoidance rules aimed at discretionary trusts – one of the preferred corporate vehicles for small businesses.
These measures include a profit first rule and the taxation of non-commercial loans and the distribution of unrealised profits.
While discretionary trusts, such as family trusts, have some tax benefits, their administration flexibility and ability to protect assets made them popular.
The Government has decided to leave fixed trusts alone and is still considering rules for determining excluded trusts.
Jackson McDonald taxation consultant Graham Harrison said fixed trusts were probably being exempted because they were used as a foreign investment vehicle.
“I think the Government has become nervous with the state of the Australian dollar and doesn’t want to effect the ability of fixed trusts to bring in foreign investment,” Mr Harrison said.
Institute of Chartered Accountants of Australia principal tax reform consultant Ken Traill said the profit first rule was extremely harsh.
“Any distributions from a trust will be treated as profit first,” he said.
Company distributions to shareholders are not treated this way. Capital distributions are not taxed while profit distributions are.
A company could make a $200,000 distribution to a shareholder, split 50-50 between capital and profit. Only $100,000 of that would be subject to tax.
If a trust made the same distribution, the full $200,000 would be subject to tax.
A Treasury spokesman said fixed trusts had arrangements that allowed tax to be clawed back after distribution.
He said with discretionary trusts, there was no clawback of tax preferred income.
Council of Small Business Organisations of Australia chief executive Rob Bastian said he could not see any genuine revenue gains from the Government’s approach.
“In my view this is an extremely large hammer to crack a very small nut.”
Mr Bastian said the Government had provided few figures to back up its legislation.
“We couldn’t do a cost benefit analysis of what they are proposing,” he said.
“I don’t know what level of rorting they think is there. Until we see some figures, we’re just shadow boxing to see if the ends justify the means.”
Mr Bastian said small businesses that used such entities faced an extremely complex decision.
The Ralph Review of Business Taxation set out to create consistent rules for the taxation of limited liability entities such as pty ltd companies, partnerships and trusts.
Instead, the Government has created a set of anti-avoidance rules aimed at discretionary trusts – one of the preferred corporate vehicles for small businesses.
These measures include a profit first rule and the taxation of non-commercial loans and the distribution of unrealised profits.
While discretionary trusts, such as family trusts, have some tax benefits, their administration flexibility and ability to protect assets made them popular.
The Government has decided to leave fixed trusts alone and is still considering rules for determining excluded trusts.
Jackson McDonald taxation consultant Graham Harrison said fixed trusts were probably being exempted because they were used as a foreign investment vehicle.
“I think the Government has become nervous with the state of the Australian dollar and doesn’t want to effect the ability of fixed trusts to bring in foreign investment,” Mr Harrison said.
Institute of Chartered Accountants of Australia principal tax reform consultant Ken Traill said the profit first rule was extremely harsh.
“Any distributions from a trust will be treated as profit first,” he said.
Company distributions to shareholders are not treated this way. Capital distributions are not taxed while profit distributions are.
A company could make a $200,000 distribution to a shareholder, split 50-50 between capital and profit. Only $100,000 of that would be subject to tax.
If a trust made the same distribution, the full $200,000 would be subject to tax.
A Treasury spokesman said fixed trusts had arrangements that allowed tax to be clawed back after distribution.
He said with discretionary trusts, there was no clawback of tax preferred income.
Council of Small Business Organisations of Australia chief executive Rob Bastian said he could not see any genuine revenue gains from the Government’s approach.
“In my view this is an extremely large hammer to crack a very small nut.”
Mr Bastian said the Government had provided few figures to back up its legislation.
“We couldn’t do a cost benefit analysis of what they are proposing,” he said.
“I don’t know what level of rorting they think is there. Until we see some figures, we’re just shadow boxing to see if the ends justify the means.”
Mr Bastian said small businesses that used such entities faced an extremely complex decision.
