80 years of discretionary trust use undermined by trust tax changes: CPA

”People hear the word ’trust’ and imagine sophisticated tax planning, but for many small businesses a trust is simply the structure they’ve used for years to run their business and protect family assets,” CPA Australia tax lead Jenny Wong (pictured) said.

In its submission, CPA Australia warned that an unnecessary and significant cost burden will be imposed on small and family businesses for using this structure.

Wong stressed that the structure is used by these businesses for asset protection, succession planning, and operational flexibility.

”The challenge with the current proposal is that it assumes restructuring is a straightforward solution, yet CPA members tell us the reality is very different,” Wong said.

This includes the costs to restructure, she added.

The submission emphasised the risk of needing to restructure, with its analysis estimating that the cost of restructuring is $9,500 to $23,400, excluding any state duties, and that these costs are largely fixed.

Restructuring out of a discretionary trust is complex and requires the engagement of accountants, lawyers, valuers, financiers, and state revenue authorities, Wong said.

”It is not a form-filling exercise. Businesses may need to establish new entities, transfer assets, update licences, renegotiate finance arrangements, move employees, amend contracts and review tax consequences across multiple areas of law.”

”One CPA member recently completed a restructure from a trust to a company. It cost around $22,000 and more than 60 hours of the owner’s own time, which the client described as traumatic – and that was the favourable case, with no property changing hands. A related entity that holds land in Victoria could face a significant study duty bill,” she said.

Through its estimates, the submission said that if around half of the potentially affected businesses, roughly 105,000, restructured within three years, it would cost $1 to $2.5 billion in professional advice before stamp duty.

“For many small businesses, this isn’t a tax reform issue. It’s a restructuring cost issue,” Wong said.

Further, the submission called for a carve-out arrangement for where there is little or no policy concern, such as mischief, for trusts with a single beneficiary.

“A simple election would also let eligible trusts meet the policy objective without restructuring at all.”

CPA Australia said that its 15 recommendations provide alternative approaches to achieve Treasury’s policy objective of addressing the concern that discretionary trusts allow lower tax rates through income splitting, without placing an unnecessary burden of cost, complexity, and uncertainty on small businesses.

”Reforms must be workable in practice. By that measure, this reform should be reconsidered, rather than simply adjusted. If the cost of restructuring is more than the tax a business would owe, or if advice is not available when it is needed, the transition is not working as intended,” Wong said.