Senate Economics Legislation Committee, , 7:40:45 to 7:47:47
Treasury defends its modelling of the trust regime, addressing concerns about effective tax rates potentially exceeding 60% and the distributional analysis of private trust holdings.
Topics: Government spending, Efficiency dividend
Speakers: Laura Berger-Thomson, Hon Katy Gallagher, Senator Jacinta Nampijinpa Price, Katrina Di Marco, Unknown Speaker, Senator Lisa Darmanin
So I might also ask my colleague Shane Johnson to kind of outline some of that. But there was quite a lot of material provided in budget statement number four, which we have spoken about at this committee. I think we spoke about it at the last hearing, which you know go went to the use of discretionary trusts, some of the distributional analysis around kind of who who uses discretionary trusts and you know what the impact of that is on the equity and the efficiency of the tax system. So that's provided in budget paper one statement four.
So that precise modelling. Was there any further modelling done besides what was provided within the budget papers? That speaks to the impact of the proposed discretionary papers.
Senator's two sets of modelling. There's the analysis that was done as part of the budget papers with which which Dr. Johnson may wish to talk through. But there's also sort of extensive analysis on the implementation aspects of it that is contained within the impact analysis, where I think the department has sought to be very transparent about those transition costs and how it expects to affect different kinds of trusts and distinguishes between those who are in business and those who are not in business.
Specifically small business modelling?
Senator, the major the majority of trusts in business are small business. And I think that's outlined quite clearly actually in the impact assessment as well.
So experts have suggested Australian small businesses could face tax bills as high as 77% thanks to these changes. So the Assistant Treasurer hasn't wanted to get into specifics or rule out rates over 60%. Can you confirm what the highest effective tax rate is that a small business could face with these changes?
So I'm I'm happy to talk about talk about that. So the policy is designed to discourage the combination of discretionary trusts with corporate beneficiaries, and this is outlined actually in the impact analysis. And the reason it's designed to do that is because that combination gives the most flexibility to split stream and defer income to minimise tax. So that's a you know a deliberate and because I think what you're talking about is the um the fact that corporate beneficiaries are not eligible for the um credit for the minimum tax paid at the trust level. So it's uh you know the government has kind of outlined and and indeed it's it's um in the impact assessment, um, the purpose of that particular feature of the trust legislation.
Um more specifically though, you can't rule out that it could be over 60 per cent.
So I think I think what what the purpose of of this particular feature is to reduce the incentives to undertake some of that um you know, utilising some of those opportunities to minimise tax through through those types of structures, it deliberately disincentivizes the use. Minimising taxes, it it deliberately disincentivizes the um the distributions to corporate beneficiaries. So we in terms of that kind of who pays some of those those kind of rates of tax, we actually don't expect a large number of businesses to pay those rates of tax because we expect them to restructure, take advantage of the election, and to um, you know, in some cases, depending on their circumstances, actually pay the minimum tax. So you're that'll depend on on individual businesses' facts and circumstances.
So to be clear, you can't provide um confirm nor deny the highest rate highest effective tax rate that a small business may face as a result.
we can't give individual advice around how a business individual kind of assessment of how a business might choose to structure its arrangements. Um what we are doing is providing restructuring support, alternatives, other measures to support small business, but we are changing arrangements and it and introducing a minimum tax on discretionary trust. That is a policy decision of the government.
So fundamentally, you can't actually stipulate or demonstrate that you understand how this might impact a small business. So a small business person is not going to know until they go through the entire rigmarole of restructuring to understand the complete outcome of what that is.
That's what we're saying and the impact analysis and some of the work that's been done and produced steps that through. What I would say, Senator Nam Jimber Price is that what we know is that more than 90% of small businesses are not affected in a given year. It is a small percentage, and we are offering alternatives to those businesses that might be affected to support their any restructuring they might do. But also 95% of tax filers don't receive discretionary trust distribution, and the wealthiest 10% of Australian households hold over 90% of the value in private trusts. So well again, I bring it back to the overarching decision that the government has taken, which is to more fairly align income earned through wages from people going to work and work and earning that income and the tax they pay on that income with income earned through assets and other structures like trusts. That's what we're trying to do here, and with that we will be providing tax relief to working Australians because at the moment, and the data is very clear on this, working Australians, if you compare it to people who earn their income through trusts, are on average paying higher rates through income tax.
And I just just quickly I'll I will pass the whole one and then I'll just make it. Absolutely happy to pass it on. I just want to state that what I'm seeking is not an opinion but um policy fundamentally about what how these small businesses will be impacted because they're wanting to understand themselves. But I'll pass on the thank you.
Um Senator McDonald.