Trust tax advice bill could balloon to $2.8bn: CPA Australia

Under the exposure draft, discretionary trusts in existence on 1 July 2028 may elect into a regime that avoids both the minimum tax and the need to restructure into a company. The election can only be made once during the 2028-29 income year and cannot be reversed.

In its exposure draft legislation explainer, the government said around 350,000 active small businesses operated through a discretionary trust structure in 2022-23 (less than 15 per cent of all active small businesses).

It added that of these, around 140,000 businesses (40 per cent) are not expected to pay additional tax or need to restructure in any given year.

But while Treasury has costed this on around 350,000 small businesses, CPA Australia tax lead Jenny Wong said this measure would impact far more taxpayers than Treasury’s estimates suggest.

She said 850,000 discretionary trusts lodge a return each year and every one of those trustees would have to decide whether to elect to make fixed distributions, adding that “if you don’t decide, you’ve decided”.

“In our modelling, the cost of professional advice alone is between $2 billion and $2.8 billion,” Wong said.

“That’s incurred before anyone restructures, and whether or not a single trust elects. It’s the cost of working out the answer, not the cost of complying with it. This isn’t the cost of paying the tax. It’s the cost of working out what to do about it.”

Explaining CPA Australia’s modelling to Accountants Daily, Wong said the body made a professional estimate of how much time it would take to obtain advice to make the election for 850,000 trusts.

“We arrived at the number of around 7.9 million hours by the average professional services rate, and that’s how we calculated those costs of between $2 billion and $2.8 billion,” Wong said.

“That’s before you’ve taken any action, done any restructuring, or paid any taxes. It’s the time required to simply work out what to do.”

While Wong said CPA Australia accepts the government’s policy objective, she said it can achieve this without taxing people above their own rate, and “without this level of cost and uncertainty”.

While CPA Australia’s submission acknowledged that the government is genuinely attempting to give affected family businesses an alternative to restructuring into a company, it said it is of the view that the better and more proportionate response is to reduce the number of trusts that need to engage with the election in the first place.

It said that because the beneficiary credit is not refundable, a beneficiary whose only income is the distribution loses $9,748 a year on anything between $45,000 and $135,000.

“That's the same amount whether you're on $50,000 or $130,000, and the measure raises revenue from nobody else. An adult child studying full-time and a retired beneficiary with no other income are treated exactly the same as someone in a genuine income splitting arrangement. The provision looks at the rate, not the reason,” Wong said.

“The people who are genuinely on a low income will end up paying more tax at 30 per cent, even though if they had earned that income outside a trust, they would have paid a lot less. It doesn't distinguish those who have genuinely low income versus those who have intentionally manufactured a low income through income splitting arrangements.

“The policy needs to be better targeted in that regard. It’s a very broad-brush response to trying to stop income splitting arrangements.”

While the government said the election would not require a restructure and is not expected to trigger state and territory stamp duty, Wong said each state and territory operates under its own piece of legislation. As such, each of them would need to scrutinise the nuances to determine if stamp duty would be triggered.

“We've written to all the states and territories asking them to resolve the stamp duty issue that arises in relation to making the fixed distribution election, the excluded election trust (EET),” Wong told Accountants Daily.

“We haven’t heard back from them and we don’t know what their views are. Without confirmation from all the states and territories on whether stamp duty applies or whether it’s excluded and exempted, I don’t think any taxpayer can make the fixed distribution with any confidence that it’s not going to cost them money. We can’t rely on the federal government’s statement. It’s an explainer. It’s not law.”

Noting that the government may have meant that stamp duty would not apply because taxpayers will not need to do the rollover exemption, Wong pointed out that they have not considered that switching to fixed distributions could potentially trigger stamp duty.

“Even revoking the election and going back to a discretionary trust could potentially trigger stamp duty. It’s very uncertain and complex at the moment,” Wong concluded.