Greater impacts in trust tax changes for lower, middle-income beneficiaries: FAAA

“For many businesses, this reform effectively forces them to transition to a company structure, as the minimum trust tax of 30 per cent is significantly more than the small business tax rate of 25 per cent,” the submission read.

For members of the body, discretionary trusts are used for asset protection, succession planning, family ownership arrangements, and business continuity.

With 350,000 small businesses to be impacted according to Treasury, FAAA said that these businesses would be “forced to actively consider making a change”, which will introduce cost and time burdens. The body said that restructuring into fixed company shareholdings may materially change control, succession, asset protection, and economic entitlements.

“These consequences can be difficult and costly to reverse and may not be adequately addressed  through rollover relief alone.”

“The consultation paper provides little detail on the reason for this tax reform, other than the high-level suggestion that this will better align the tax rate on trust income with the tax rates paid by workers.”

“Neither does the paper provide an assessment of the impact that this reform will have on the various cohorts of taxpayers who will be impacted, or explain why increasing the effective rate of tax on corporate beneficiaries of trusts to at least 55 per cent is necessary or justified.”

While it said that it “appreciates” the government’s objective to address tax minimisation through income-splitting arrangements, FAAA said that other alternatives need to be considered to achieve the tax-outcome policy objectives.

The body noted that there “does not seem to have been” sufficient consultation where alternative solutions were sought to address the issue.

There are a range of integrity measures in place to prevent tax avoidance, including penalty rates of tax that apply to unearned income of minors, the body said. However, with the exception of those in vulnerable circumstances and beneficiaries of testamentary trusts, tax rates for minors are prohibitive, it said.

The association said members also expressed concern about the length of the transition period for temporary rollover relief that will start on 1 July 2027 and end on 30 June 2030.

“Many of our members are strongly of the view that three years is not enough for this transition period.”

“As this reform will force many businesses to restructure and for some the decisions will have significant complexity, we would recommend that the timeframe be extended to five years, that more flexibility is offered, and that businesses get relief from the minimum tax until 1 July 2032.”

The body noted that, in the face of these changes, some may seek alternative solutions to avoid the need to restructure, such as employing beneficiaries within the business to avoid the implications of the minimum tax on any distributions to them.

It said that while the minimum tax rate is framed at 30 per cent, the Medicare levy cannot be reduced by a tax offset.

“[This] will mean that the minimum tax rate for many will actually be 32 per cent.”

“It is our view that this will actually have a greater impact on lower and middle income beneficiaries in particular circumstances, especially where the non-refundable tax offset cannot be fully used or cannot reduce the Medicare levy.”