Trust issues with Shorten’s plan

“Frothing at the mouth”: a description of someone white hot with rage, ranting feverishly over what is usually not much of an issue.

This is something I occasionally do. Sometimes for fun. Sometimes right here in this column. But mostly over topics that would bore most.

Most recently, I did it last weekend.

After two years of attending some netball program on Friday afternoons, my DebtGirl played her first “real” game of netball. But just minutes into the game, it was crystal clear that none of the team had the first clue about netball’s rules. Not. A. Cracker.

“This is insane! What have the coaches taught them for the last two years?” I frothed at Mrs DebtMan. Probably a dozen times.

“They were getting skills training, which, clearly, aren’t on display right at the moment. You REALLY need to go away,” Mrs DebtMan said. “Come back in about four weeks.”

Mrs DebtMan was right. I won’t attend the next few weeks. I’ll sleep in Saturday mornings. And I’ll come back later and they’ll be killing it.

Frothy mouths were witnessed in great numbers over Bill Shorten’s plans to tax the bejesus out of family trusts.

Tax ’em like companies, Bill says. Stop this income splitting rort. Minimum 30 per cent tax, before they hand it out to beneficiaries.

Read the reader comments at the end of any major news outlet’s story on the issue and you’ll see both Coalition and ALP supporters frothing like Cujo.

The reality?

I can almost assure you that whatever figures Labor has done on how much extra tax this policy will raise … will most likely be overstated.

We need to see the details. No point getting too upset until we do. And we may never see the fine print, if Labor doesn’t win the next election.

Much of the concern comes from honest family businesses, fearing they will be caught up in this proposed new taxation of family trust income.

Largely, small family businesses won’t be caught up in this. Labor hasn’t said so – and the Coalition hasn’t argued – because they don’t want to flag to people how most will get around it.

Leave that to the accountants. And me. Now.

Firstly, small business owners will change how they derive their incomes. They will become employees, instead of trust beneficiaries. Say mum is running the business, while Dad is a government employee, earning a salary. Instead of income being received as trust distributions, Mum pays herself a salary through the business. And, if necessary, Dad also becomes an employee of the business.

The main “cost” here will be WorkCover and payroll tax, for larger businesses (that does not exist for those who derive their income from only trust distributions). For non-dangerous industries, this will be quite small, certainly in comparison to the 30 per cent trust tax.

The money paid through the business will be regular PAYG income, subject to normal tax rates, with the first $18,200 tax free. It’s not until income of more than $37,000 is paid that the tax rate for personal income would go above the 30 per cent that would be paid under Bill’s plan.

But here’s the bit I don’t understand about what Bill is saying. Or that those who are frothin’ about it, don’t realise the easy solution to.

One of Bill’s major concerns is that the university-age kids are receiving income from the trust, from the business that their parents are running.

They’re not actually earning an income, but their parents are distributing $18,200 a year, tax-free, from the trust. And then more.

They still can. And will. For legitimate businesses, owned by a trust.

If this trust owns the family business, the kids will simply also become employees of the business. This won’t work, easily, where there are other shareholders. But it won’t be impossible.

I can see where they are likely to collect extra revenue. And that is where there is no business actually operating, where income can’t actually be paid as salary, instead of trust distributions.

But it’s hard to see where traditional small business – without seeing the detail of Labor’s proposals – will be financially bashed up by this proposal.

Just wait for the actual details before going all Cujo on this one.

Bruce Brammall is the author of Mortgages Made Easy and managing director of Bruce Brammall Financial. E: bruce@brucebrammallfinancial.com.au.