Trust tax overhaul doesn’t solve stamp duty issue

The government has added a new option that allows a trust to be exempt from the minimum tax if they elect to make fixed distributions to pre-nominated beneficiaries as an alternative to rollover relief. The election would not require a restructure, and is not expected to trigger state or territory stamp duty, according to the government.

The government will also introduce a new fixed trust definition, which it said will ensure that a trust can be considered a fixed trust for income tax law if there are no material discretionary elements impacting the entitlements or rights of the trust’s beneficiaries.

Responding to the government’s proposal, CPA Australia tax lead Jenny Wong called the election option a “genuine improvement”, as businesses can avoid the minimum tax without having to restructure into a new entity.

Wong noted that Treasury has also addressed another concern by indicating that the election is not expected to trigger state and territory stamp duty consequences.

“Whether the election works is a separate question that will be debated during this very short consultation period,” she said.

State stamp duty for restructuring businesses

However, she warned that businesses that choose or are required to restructure still face state tax consequences, something it said the draft legislation fails to address.

“The government has recognised that restructuring out of discretionary trusts requires transitional support, which is why it has proposed a time-limited restructuring rollover,” Wong said.

“What it does not address are the regulatory and state stamp duties. For those where restructuring is still the best option, the rollover relief helps address the income tax and CGT consequences barrier that has stopped businesses from restructuring for decades. But the Commonwealth can only relieve Commonwealth taxes. The stamp duty barrier to restructuring still remains.”

This means two businesses in identical circumstances could face different stamp duty issues depending on which state they operate in, Wong pointed out.

”Good tax reform should not create avoidable barriers for businesses trying to comply with the law,” Wong said.

She urged the government to make stamp duty and associated costs deductible to lower the barrier, adding that it is within the Commonwealth power to do so.

“Deductibility is a practical answer while the longer conversation with the states and territories continues. It shouldn't wait for eight jurisdictions to agree. Getting this right matters more than getting it done quickly.”

Business group demands economic modelling

The Family Business Association has urged the government to release its economic modelling behind proposed minimum tax reforms on discretionary trusts before the consultation deadline, including revenue estimates and the number of businesses expected to be impacted, the number expected to elect fixed distributions, and the compliance cost per business.

Family Business Association CEO Catherine Sayer said: “Every version of this measure has been more complicated than the last. A family business owner now has to weigh a fixed-distribution election, an eligibility test, a rollover, or paying the minimum tax, and then pay an adviser to work out which path they can actually live with.

”Discretion is how family businesses manage a variable year, a succession or a change in which family member is working in the business. An election that locks distribution in place solves one problem but creates another.”

The association said the draft legislation remains incomplete as integrity and administration settings are yet to be published, increasing uncertainty for family businesses.

The government has only provided a two-week consultation period for the draft legislation, with consultation due to close on 18 September.

CA ANZ tax, superannuation, and financial services leader Susan Franks said the consultation period is too short for reforms of this complexity, while questions remain about how the election could interact with trust law and existing tax rules.

”The interaction with the family trust election regime is likely to be particularly challenging,” Franks said. 

”We will review the legislation carefully and consult with members before reaching a final position. Our focus will be on whether the measures achieve their objectives without creating unnecessary complexity, compliance costs or unintended consequences.”

Tax policy is still flawed

The Council of Small Business Organisations Australia (COSBOA) said that while the proposed trust tax changes would deliver a better outcome for affected small businesses as they could avoid paying more tax without having to restructure an established trust arrangement in their business, the broader tax policy remains flawed.

COSBOA chief executive Sky Cappuccio said: “There is still a trade-off. Businesses choosing this pathway may retain their existing structure and tax treatment, but they will give up some of the flexibility over distributions that is an important feature of discretionary trusts. That flexibility is particularly important to succession planning in family trusts.”

Cappuccio expressed concerns that if a trust revokes its election under this draft legislation, its taxable income for that year would be taxed at the highest marginal rate plus the Medicare levy, rather than immediately returning to the minimum 30 per cent tax treatment.

“This is unnecessarily punitive and does not reflect the realities of family businesses, which can change and evolve over time,” she said.

“We call on the government to amend this approach before the legislation goes ahead.”

The Australian Chamber of Commerce and Industry (ACCI) said the option to be exempt from the minimum tax if small businesses make fixed distributions to pre-nominated beneficiaries does not account for the variability of income in small businesses and the need for flexibility. It said few businesses are likely to benefit from the measure.

Businesses still to take a big hit

ACCI chief executive Andrew McKellar said the exposure draft legislation confirms that businesses would take a substantial hit from it. The government is proceeding with higher taxes on small businesses “at the worst possible time”, he said, amid a slowing economy and contracting productivity.

”The federal government continues to ignore clear calls from across the business community to stop this big hit on small business,” McKellar said.

“These changes impose higher taxes on small businesses structured as trusts, and can also force these small business owners to cop big costs to restructure.”

The ACCI said nearly 240,000 small businesses use discretionary trusts to protect assets, manage irregular income, and distribute profits. It said the 30 per cent minimum tax on trusts would impose restructuring costs on businesses as well as stamp duty liabilities of up to 5.5 per cent depending on the jurisdiction and value of the asset.

”Imposing a minimum 30 per cent tax on these small and family businesses will mean they have less money to reinvest and grow, fewer opportunities to take on new staff, and reduced capacity to pay down debt,” McKellar said.