Trust tax penalty a ‘punishment’ for small businesses

The Council of Small Business Organisations Australia (COSBOA) chief executive Skye Cappuccio not only slammed the proposed 30 per cent minimum tax on discretionary trusts as bad policy that could hurt small businesses, but also labelled the 47 per cent tax treatment for businesses as “punitive and unnecessary”.

“Part of being a family business is that you evolve with the family, so change is almost inevitable. This seems like an inappropriate punishment,” Cappuccio told Accountants Daily.

While calling the fixed distribution option the “least-worst” option compared to others being considered, she said it still wasn’t something small and family businesses could genuinely consider.

“It comes with the kicker that in the exposure draft that when they move away from that election, say when a family member comes home to work in the business, and they want to change how they are distributing and they change their allocations for beneficiaries, they get for that year a 47 per cent tax rate on their trust income,” Cappuccio said.

She pointed out that family businesses evolve as children might decide to join it and assume a more significant role. In these circumstances, a family may need to change who receives distributions.

“If making one of those changes means losing access to the elected arrangement, why should that business then be taxed at the highest marginal rate for that year?” Cappuccio asked.

“There is a straightforward alternative. Let the business move to the government’s proposed 30 per cent minimum tax. There is no need to impose a higher rate for that year. The government’s underlying 30 per cent minimum tax remains bad policy. But if it intends to proceed, it should not make a bad policy worse by punishing small family businesses simply because their circumstances change.”

Cappuccio pointed out that the government originally suggested small businesses could seek the lower 25 per cent small business company tax rate by restructuring into a company.

“Investigations by our experts showed that for a small business to restructure, it costs between $15,000 to $50,000 in legal and accounting costs,” she said.

“It also requires an extreme amount of paperwork and regulatory activity as they essentially need to renegotiate all of the contracts they hold. This includes everything from insurance to lease agreements to financing.”

Alongside this is a lack of clarity on whether stamp duty would apply when businesses opt for fixed distributions. While the federal government has suggested it does not expect this to result in state and territory stamp duties, Cappuccio said this remains disputed among specialists in the field.

“We need 100 per cent clarity on this before the legislation goes ahead,” she said.

She said she foresees significant, time-consuming compliance activity and costs for small and family businesses if this proposal is legislated and they opt to restructure out of a discretionary trust.

As such, Cappuccio called on the government to provide comprehensive guidance on how to make and continue elections in a compliant manner under the regulations, how to revoke elections if circumstances require it, and what the consequences of revocation are.