Proposed changes to the tax treatment of family trusts could affect thousands of small business operators if the ALP wins Saturday’s Federal election.

The proposed tax rate of 30 per cent on all distributions from a trust is the same rate applied to Australia’s biggest listed companies.

The changes would force many mum-and-dad businesses to pay thousands of dollars more in tax, though a unique carve-out for farmers would see many wealthy family trusts come out unscathed.With a proposed start date of July this year, Labor estimates the change would raise $4.1 billion over the next four years.

RSM Australia’s senior tax manager Tracey Dunn said the change would have a significant impact.

“Business profits will be taxed starting at a minimum rate equal to the tax rate imposed on large corporate taxpayers,” Ms Dunn said.

In their discretionary tax reform policy document, Labor claims the shift is targeted at high-income earners who use trusts to avoid paying tax.

“Discretionary trusts are being used to reduce high income earners’ tax liabilities through ‘income splitting’,” it says.

“Income-splitting allows high-net worth people on top marginal tax rates to reduce their tax bills by apportioning their non-PAYG income, like investment income, to people (usually family members) who face much lower marginal tax rates.”

Discretionary family trusts are a popular way of structuring a small business operation because it can protect personal assets from being accessed by creditors in the event of a business failure and allows the distribution of income to beneficiaries of the trust.

In this case, the small business is usually run within the trust and the trustees, typically the business owners, will distribute profits to the listed beneficiaries.

These can include individuals who are not actively involved in running the business.

Business profits will be taxed starting at a minimum rate equal to the tax rate imposed on large corporate taxpayers.

Family trusts are used extensively by tradies such as plumbers and carpenters with many running for decades.

Under current arrangements if the profits are fully distributed, the trust pays no tax on the distribution but the individual receiving the distribution pays tax at their personal marginal tax rate.

The distribution can vary from year to year to any beneficiary of the trust and this feature allows the tax burden to be shared equally.

Because the individual is taxed, each can access the $18,200 tax-free threshold and make use of tax offsets to reduce the total tax bill further. For adult Australian residents it means no tax is payable in 2018-19 if an individual earns less than $21,595.

A higher threshold applies for seniors who can access the senior and pensioners tax offset.

For singles the threshold is $32,915 and for eligible couples, a combined $59,218.

For children, changes dating back to the early 1980s mean they can receive $416 a year tax free and thereafter, are effectively taxed at the top marginal tax rate of 45 per cent.

Under the proposed change, each dollar distributed to anyone aged 18 years or over would be taxed at 30 per cent, no matter how small the distribution is.

Special disability trusts, charitable trusts, testamentary trusts and public unit trusts, such as managed investment funds are not affected by the proposed change.

The policy also refers to “farm trusts” being exempt from the change.

“They do not provide any detail on what they would consider to be a farming trust,” Ms Dunn says.

Many large farming operations are set up through family trusts allowing the profits to be distributed to multiple beneficiaries.

The bigger the family, the more the profits can be divided which appears to be at odds with the intent of the reform.https://thewest.com.au/business/your-money/federal-election-2019-tradies-family-trusts-in-bill-shortens-firing-line-ng-b881193465z