Extra tax on discretionary trusts only material for sufficiently profitable businesses, says liquidator

Peak insolvency levels arise from difficult trading conditions, he noted.

“So if a business is insolvent, whether it's in a trust or a company, there's really no difference. It needs to look at its restructuring options to reduce debts or close and liquidate.”

For growing businesses, trading trusts are not a great structure, Archer said, and they cannot retain profits as a company can.

“Income is pushed out to beneficiaries each year, which can leave individual business owners with personal tax debts they can’t pay,” he said.

Often used by smaller businesses, it would make more sense for trading trust businesses to transition into a company structure as the business grows, Archer said. This way, profits can be retained in the company rather than being distributed to beneficiaries annually.

“I think some business owners may find that moving to a trading company, and possibly a holding company, gives them better control over taxable income,” Archer said.

Archer said that illegal phoenixing is on the rise due to the poor state of many businesses, not due to changes to discretionary trust tax.

“Phoenix activity is usually about avoiding existing debts. These changes are about tax on profits. Trusts generally don’t carry income tax debts in the same way companies do, although they can still have BAS liabilities, including GST, PAYG and super-related debts,” Archer said.

The changes would seem to impose a heavier tax on lower-income earners who use trading trusts than on higher-income earners who use trusts.

“Individual trustees cop debts personally, preventing any meaningful insolvent restructuring,” Archer said.

Treasury’s discretionary trust tax consultation paper is open for submissions until 31 July.