Small business concerned over changes to trust taxation

THE forthcoming Review of Business Taxation is likely to significantly alter the entity tax regime.

The Government has indicated that trusts will be treated the same way as companies for taxation purposes.

This significant change is of grave concern to the 260,000 small businesses currently operating through a trust structure.

However, Paul Hockridge, tax spokesman for the Australian Society of CPAs said that there may be light at the end of the tunnel for small business.

The Government has indicated that there will be significant concessions for small business in the upcoming review of business taxation.

Mr Hockridge said that one concession under consideration is a ‘carve out’ for small business in the entity tax regime similar to that proposed for farmers.

This would avoid unnecessary compliance costs on the small business sector. The ‘carve out’ would reduce the burden to this sector but still protect Government revenue.

“A carve out of trusts for this sector will go some way to alleviating the cash flow pressures of the new Pay-As-You-Go (PAYG) system,” Mr Hockridge said.

“Under PAYG, small business is likely to have to bring their tax payments forward – placing pressure on what is traditionally a cash-strapped sector of the economy.

This burden may be avoided if small businesses operating through a trust were outside the entity tax system.”

Mr Hockridge said the PAYG system is of considerable benefit to the Government as it centralises tax collection in all of its various forms but it is difficult to see any advantage for taxpayers.

Anything that essentially brings forward the payment of tax hurts the small business sector.

Mr Hockridge also rejected the suggestion that partnerships would become the preferred operating vehicle for small business.

“Partnerships were never considered to be part of the entity tax regime and they don’t offer the same asset protection to a small business.

“It is quite common to own assets in one entity and operate the business in the other.

“Currently, if one entity makes a loss this can typically be offset by the other entity. The entity tax regime might change this.

“The income in the profitable entity might be taxable at the full entity rate with no ability to offset the loss in the other entity.

“The alternative is a consid-erable freeing up of the loss transfer rules, which seems very unlikely to occur.

“A carve out for small business remains therefore the best method of protecting this sector.

“The most viable option is to exclude trusts which make family trust elections from the proposed changes.

“This would still achieve the Government’s reform objectives but would impose significantly less onerous compliance burdens on small businesses operating through a trust,” he said.

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