Tax reform uncertainty causing decision ‘paralysis’

“Paralysis is perhaps an extreme word. But businesses don’t like making decisions when they’re not quite certain what the outcome could be and how the new rules could apply. Therefore, they’ll wait to make those decisions.”

The uncertainty is most evident with the proposed changes to the discretionary trusts regime as businesses and individuals consider making decisions around how to structure their new business, investments, and/or acquisitions.

“They are being left in a bit of limbo because we don’t know the exact details of those provisions and what they will look like,” Molesworth said.

“We might think we’ve got a broad outline but that could always change when the exposure draft gets redrafted and sent to Parliament.”

Given the magnitude of the “fundamental” changes being proposed by the government, Molesworth underscored that the period of uncertainty should be kept as short as possible “so that businesses and entrepreneurs can get on with making decisions, which is what they’re good at”.

Another concern highlighted by Molesworth is SMEs could incur significant compliance costs as a result of this round of proposed tax reform should it become law.

For example, the controversial legislation to replace the 50 per cent capital gains tax (CGT) discount with cost base indexation and implement a 30 per cent minimum tax on capital gains cleared both houses of parliament in June.

However, Treasury’s consultation on the second tranche of CGT changes included the complex nine-step apportionment method, which is a mathematical formula that applies to assets held before 1 July 2027 and sold afterwards where the taxpayer chooses not to obtain a formal market valuation as of 30 June 2027.

This was introduced under Australia’s Income Tax Assessment (Method for Apportioning Capital Gains and Capital Losses) Determination 2026.

Molesworth said those who opt for a valuation rather than the apportionment method would face increased compliance costs. He noted that there may be a need to obtain a valuation of all the assets in the economy that are held by individuals and trusts as at 1 July 2027 (it does not have to be undertaken on that date).

“The need to value all of those assets is expensive,” he said.

“My concern is that the architects of that legislation thought about assets in terms of shares or property which are relatively straightforward to value and which have historically been done at relatively low cost. This is either because there’s an observable market price with things like listed shares or comparable transactions are relatively easy to find.

“But there are lots of business assets out there that need to be valued. Valuing a business is a considerably more expensive process and takes longer. There are few comparable transactions and you may have to obtain specialist valuation advice. It’s expensive.”

On top of this, business owners with trusts would also have incurred the costs of obtaining advice on the optimal strategy in a short window, Molesworth flagged.

“If you’re electing into the EET regime, you’ve got to do that by the time you lodge your 2029 tax return,” he said.

“If you want to restructure, that window closes on 30 June 2030. There’s a lot to do in a very short period of time, and all of that advice is going to be required in that window.”

Consultation ‘ridiculously short’

Molesworth joined the chorus of criticism about the “ridiculously short” consultation periods provided for the exposure drafts around both CGT and discretionary trusts. He said two weeks of consultation is insufficient for the industry to understand and respond to the issues raised in the draft legislation.

“The other thing I would say is the government took almost zero notice of the consultation feedback that was provided as far as I could tell,” he said.

While the government announced amendments to the “widow’s tax”, Molesworth said it ignored larger design issues around CGT assets acquired before 1 July 2027, which are deemed to be disposed of before 1 July 2027 and reacquired on 1 July 2027. Any gain or loss from the deemed disposal will then be deferred until a later realisation event occurs.

“I think the government and Treasury have pushed draft legislation through despite it having deeply ingrained design problems. It seemed to be a case of let's push through a base level and then we'll fix all the problems later. That to me is not proper public administration,” he said.