Tax reform tranches bring uncertainty, extra costs

“This suggests not merely a drafting problem but the need for a coherent underlying legislative framework,” the submission read.

The body also criticised the consultation period of just over two weeks for tax reforms of this magnitude, and noted that releasing further amendments so soon after the first tranche of tax reform legislation passed parliament raises broader concerns about how these reforms are developed.

“Addressing technical deficiencies and unintended outcomes through iterative legislative tranches creates severe uncertainty, inflates compliance costs, and risks forcing taxpayers to apply incomplete rules,” the submission read.

“STEP Australia recommends that Treasury conduct a further round of consultation on revised draft legislation and explanatory materials prior to introducing the bill into parliament.”

CGT, trust tax regimes must be in harmony

Addressing some components of the government’s tax reform, STEP Australia stressed that the proposed CGT tax regime must interact consistently with the separate discretionary trust tax framework to avoid uncertainty for trustees.

Specifically, it said proposed concessions for testamentary trusts and deceased estates must operate clearly and consistently across the 30 per cent minimum tax on capital gains (starting 1 July 2027) and the proposed 30 per cent minimum tax on discretionary trust distributions. 

The submission said that inconsistent rules and definitions between the two tax regimes could create uncertainty for trustees, executors, and beneficiaries, while increasing compliance costs. 

While noting that the two regimes address different tax bases and are progressing through separate legislative processes, it said they govern the same trusts, property, fiduciaries, and beneficiaries.

“Inconsistent statutory definitions of a testamentary trust, genuine testamentary purpose, qualifying estate-derived property, or permitted beneficiary class will create severe administrative friction,” the submission read.

“Without harmonisation, a single capital transaction by a trustee risks being exempt under the CGT regime but penalised under the trust distribution regime.”

Recommendations

STEP Australia proposed five recommendations to address these issues.

First, it suggested creating a single, harmonised statutory dictionary for terms such as testamentary trust and estate-derived property that applies uniformly across both regimes.

Second, it called for complete coordination of the rules governing accumulation, asset substitution, mixed funding, post-death trusts, and beneficiary classes.

STEP Australia also insisted that an exemption granted under one regime should not be undermined by an unintended tax liability or stranded tax credit under the other regime for the same estate-derived amount.

In addition, it called for the legislation to explicitly clarify the interaction between trustee assessments under section 99 and 99A of the Income Tax Assessment Act 1936, beneficiary tax offsets, and the CGT minimum tax.

Its fifth recommendation is that the final explanatory materials include comprehensive, integrated worked examples showing the simultaneous application of both regimes to a single testamentary trust.

The professional body asked that the worked examples should address at least some of the following circumstances:

• A deceased estate sells an estate property and retains the proceeds while liabilities and claims are resolved.
• Property passes from a deceased estate to a testamentary trust, and the trustee later sells the property and accumulates the capital gain and proceeds.
• The same qualifying gain is distributed or attributed to an individual beneficiary, including a surviving spouse.
• Sale proceeds are reinvested by the deceased estate or testamentary trust, including through successive investments.
• Estate property is placed in a genuine post-death trust following an unforeseen change in a beneficiary’s circumstances.
• The calculation of cost base indexation and capital gains for estate assets acquired before 1 July 2027 and realised after that date.

“Comprehensive examples in the explanatory memorandum would materially assist executors, trustees, beneficiaries and advisers. The examples should be supported by operative provisions that clearly produce the stated outcomes,” the submission read.