‘Sledgehammer’ approach to trust tax reform labelled ‘intrusive’

“We’re looking at 12 legislative determinations and further tranches of legislation. There will be unintended consequences. That’s how much of a tangled web we are dealing with. We’re trying to sledgehammer away to achieve a certain objective.”

Greco warned that the complexity and short consultation timeframes could lead to drafting and interpretive issues, and mused that the accounting and tax professions have been asked to review proposed legislation without being privy to the details.

“Given the significant impacts on small businesses, we find this unacceptable. It also adds to a great deal of uncertainty,” Greco said.

“We look at the why. Why are we doing this? The intent behind this is income splitting and streaming. They’re the two things that have been identified. We see these raft of changes as not proportionate or not targeted.”

Greco said that while he does not support or defend artificial income splitting, particularly when it involves discretionary trusts holding passive assets, some changes like the double taxation of corporate beneficiaries are “well and truly above the policy intent”.

“What we are here to defend is the legitimate use of discretionary trusts for commercial purposes,” he said.

“To fully utilise the tax offset under this 30 per cent tax regime, you're looking at incomes in excess of $229,000. That's the difference between the marginal tax rate and the effective tax rate. We do acknowledge that the government has made some changes, but we're still left with a lot of unpalatable choices for many small businesses.”

Greco specifically highlighted that the excluded election trust (EET) model should provide businesses with more flexibility.

The government announced the excluded election trust (EET) option in response to feedback that restructuring existing trusts may not always be practical or affordable. The trustee of a minimum tax trust that exists on 1 July 2028 may elect for the trust to be an EET, in which case the minimum 30 per cent tax that takes effect from 1 July 2028 does not apply.

The election can only be made in the first income year that the rules apply (2028-29 income year) only once, and cannot be made if the trustee opts for the rollover. The trustee must nominate specific beneficiaries and lock in fixed identical proportions for both income and capital distributions.

Greco is concerned about the limitation of the option, particularly if a beneficiary is connected with domestic or family violence, mental incapacity, abuse, addiction, or someone jailed for serious crimes.

“We’re asking them to fix these entitlements, regardless of the circumstances. We’re asking businesses to do things which go against community standards,” he said.

“Then there are legal ramifications. Is the federal government going to protect advisers from state-based laws for not acting in the best interests of beneficiaries? This remains to be answered.”

Furthermore, the proposed minimum 30 per cent tax on discretionary trusts creates double taxation for corporate beneficiaries as they are denied non-refundable tax offsets for the tax paid by the trustee. Greco said corporate beneficiaries could be slapped with tax rates of up to 70 per cent.

“The double taxation of corporate beneficiaries is well beyond the policy intent,” Greco said at the hearing.

“Treasury has identified in the past reinvestment of profits in a trust and the 50 per cent CGT discount but we’re moving to indexation. That integrity issue is now muted.”

Greco said the reforms extend beyond tax and called the changes “intrusive”.

“They divert working capital from productive investment, divert business owners' focus away from running the business, disrupt normal operations, and create uncertainty for businesses,” he said.

“I want to leave off by saying [these reforms bring] a lot of costs with no productivity gain, and that's the message we want to leave the committee.”