Economists, association leaders arch up to discretionary trust business structure

CPA Australia has noted that 850,000 discretionary trusts lodge a return each year, and that an election out of the structure for all of these trusts would cost between $2 billion and $2.8 billion.

Attending the hearing, the Australian Council of Social Service (ACOSS) provided support for the discretionary trust changes, highlighting the importance of “making things more fair” as it targets high-income earners. 

ACOSS chief executive Cassandra Goldie said that the changes would ensure that everyone pays their fair share of tax.

“We should see the end of bucket companies; they shouldn’t exist,” said Dr Peter Davidson, principal advisor at ACOSS. 

Further, the “expensive industry” that operates through the existence of discretionary trusts should be shut down, Goldie added, telling the committee that she is trying her best to make sure the legislation passes as quickly as possible.

Supporting the changes, including the Excluded Election Trust and rollover, Davidson added that the 30 per cent minimum tax is a reasonable amount for small businesses to pay while staying in the structure.

Australian Chamber of Commerce and Industry (ACCI) chief executive Andrew McKellar, however, called the 30 per cent rate punitive, stressing that people using the trust for legitimate reasons should not be punished, especially with a potential double tax due to varying levels of stamp duty across states.

While the committee said that businesses will need to pay higher taxes, Davidson said that people are struggling “for reasons nothing to do with tax legislation”.

“Your average corner shop is not setting up a discretionary trust… they don’t have the resources to seek professional advice,” Davidson said.

Wrong direction

Economist Saul Eslake fronted the committee and said that he backs the rationale behind the proposals.

“The intention of the legislation in its broad thrust is something that I’ve long supported.”

Although revealing that he too owns a discretionary trust, Eslake said that it is not right for small businesses running through discretionary trusts to get preferential treatment.

“I’m not persuaded that it justifies the very significant tax advantages,” he said.

Eslake noted that in Australia, there are 40 discretionary trusts per 1,000, compared to nine in the US and two in the UK.

While there was rife opposition against the use of discretionary trusts as a small business structure, McKellar recalled a round table discussion that ACCI was involved with which included the government, and the shock announcement at the budget.

“For all of the business representatives who attended and who left that meeting in August, none of us would have anticipated that in its very next budget the government would come out with measures to impose a minimum 30 per cent tax on capital gains and a minimum 30 per cent tax on discretionary trust distributions,” McKellar said.

“None of us would have in any way contemplated or agreed to that in the room. In fact, the message from business was quite the opposite.”

“Unfortunately, this bill goes in completely the wrong direction.”

For many, being in the structure provides perks such as flexibility of ownership through intergenerational pass-down.

“The overwhelming rationale that you would have to put this kind of structure in place is around business continuity and succession. It’s flexibility of ownership; it’s the preservation of family enterprise capital. Those are the reasons that people fundamentally use discretionary trusts. It’s not for tax planning or tax avoidance or income splitting or any of these things,” McKellar said.

McKellar said that ACCI’s first preference is that the legislation be rejected; the second option is that there should be grandfathering, and the third should be a delay.