‘When you tax the same dollar twice, people stop investing the dollar’

The investment management firm says that the legislation extends far beyond the housing market and could fundamentally reshape investment incentives across the economy.

Rather than directing capital towards productive businesses, the new rules favour passive assets and established income-producing investments while increasing the tax burden on capital growth.

In the submission to Treasury’s Minimum tax on discretionary trusts consultation paper, Geoff Wilson, founder of Wilson Asset Management, said policies designed to improve economic outcomes should encourage, rather than penalise, investment in the businesses that drive Australia’s future prosperity.

Ultimately, the submission called on the government to redesign the measure so a genuine minimum tax “operates as a floor rather than an additional layer of taxation”.

Wilson Asset Management recommended that every dollar of minimum tax paid by a trustee must be creditable against tax otherwise payable on that income, and beneficiaries below the 30 per cent tax rate cannot pay more than their marginal rate.

Furthermore, Wilson encouraged the view that corporate beneficiaries must receive recognition for trustee-level tax so that the same income is not taxed twice.

Similarly, this recommendation follows CPA Australia’s recent submission, which also addressed the concern that discretionary trusts enable lower tax rates through income splitting.

Speaking to Accounting Times, Wilson noted that the consequences of double taxation would extend beyond the tax system, reducing the capital available for Australian businesses to reinvest and grow.

“When you tax the same dollar twice, people stop investing the dollar,” he said. “Our central recommendation is that the legislation should establish a 30 per cent floor and nothing more.”

When asked about the government’s fairness argument, Wilson supported the objective of a fairer and more sustainable tax system, but noted that fairness required comparable income to be taxed consistently.

“[The framework] does not justify taxing the same income twice or taxing lower-income beneficiaries above their lawful marginal rates merely because the income passes through a trust,” he said.

“The government says the proposal will better align the taxation of trust income with the tax paid by worker, but under the proposed design, a worker earning $45,000 pays tax at marginal rates below 30 per cent, while a beneficiary receiving the same amount through a trust can face a final 30 per cent tax because the offset is non-refundable, cannot be carried forward and cannot reduce the Medicare levy.”

“That is not alignment; it taxes the trust beneficiary more heavily than the worker,” he warned.

An example from the submission illustrated how Treasury’s current framework could inadvertently trigger double taxation for many investors.

According to the submission, Treasury's current framework would require a trust to remit a minimum tax of $30,000 on a $100,000 distribution directed to a corporate beneficiary.

The corporate entity would subsequently incur an additional $30,000 in company tax on the same $100,000, as the model fails to provide a credit for the tax previously settled by the trustee.

Consequently, this creates a situation in which $60,000 is siphoned as tax revenue from $100,000 in earnings before any capital reaches the final investor. Analysis further indicated that for individuals in the highest tax bracket, the cumulative tax burden could escalate to $69,714, representing an effective rate of 69.7 per cent.

Wilson Asset Management called on Treasury and the federal government to amend the design before proceeding.

“The choice before the government is straightforward,” Wilson said.

“It can legislate a genuine minimum tax that preserves Australia’s long-standing tax architecture, or it can knowingly introduce a new layer of double taxation into the Australian economy.”

“We support genuine tax reform - but a 30 per cent minimum tax must mean 30 per cent is the floor, not that the same income can be taxed at 60 per cent or almost 70 per cent.”