With the Federal election around the corner, it is important for the owners of family businesses to consider, what do the proposed changes mean for our business and our family wealth?
Discretionary Trusts
Labor’s proposal is for all trust distributions to be taxed at a minimum tax rate of 30%.
Impact to family businesses: Many family businesses are structured via discretionary trusts, so this change will dilute the tax benefits of the structure and limit the flexibility discretionary trusts provide. In the case of small businesses, for the financial year ended 30 June 2018, that is businesses with turnover of less than $25 million, if structured in a company, the tax rate will be 27.5% whereas a trust will be 30%.
Reduction of 50% CGT discount
The Labor policy paper states they will halve the CGT discount from 50% to 25%.
Impact to Family Businesses: For family businesses selling CGT assets held personally or in a trust will result in an increase in the capital gains tax payable and reduce the overall family wealth. Tax will be paid on 75% of the gain instead of 50% of the gain.
Families creating wealth outside their family business in a trust structure will be impacted by this change.
Franking Credit Refunds
On 13 March 2018, Labor announced that it proposed to end cash refunds of excess dividend imputation credits. Labor has confirmed these changes will only apply to individuals and Superannuation Funds.
Impact to Family Businesses: This change will heavily impact the wealth creation for families and ensuring the current generation have sufficient funds to retire from their business when they so choose. New investment strategies will be required for all Self Managed Superannuation Funds or these changes will heavily impact their retirement savings.
Although the policies released by Labor will cost Australian Family Businesses, ideally we would like to see the Liberal party offer policies that recognise that Australian Family Businesses are the backbone of our economy and offer policies that support family businesses. Often Government policies offer incentives to Small Business but Family Business includes small, medium and large businesses. Let’s hope the next release of policies focus on growth in the Family Business sector.