Trust tax is ‘daylight robbery that would make Ned Kelly blush’

“This is not a minimum tax. It is daylight robbery that would make Ned Kelly blush.”

Zorbas said that unlike the negative gearing and CGT reforms, there was no hint before the budget that the policy on discretionary trusts would be revamped, and it was not debated on the radio or in newspapers.

“The trust tax hikes simply ‘turned up’ unannounced – mandate free – and small and family businesses have been spinning their wheels trying to work things out ever since,” he said.

Zorbas continued that property development businesses are already paying the 30 per cent minimum tax, while some businesses would soon have income reinvested in the business (through a corporate beneficiary) taxed at between 55 per cent and 60 per cent due to double taxation.

Discretionary trusts are used by smaller developers to hold a loss-making land asset while they go through a multi-year process to bring it to market, he argued. The costs of restructuring, including stamp duty costs, and the inability to accumulate losses during the holding phase, could be significant enough to make projects “unviable”, he said.

“Implying that people, often small business owners and family developers who have complied with every law, paid taxes every year, and put their necks on the line to build the homes we so desperately need are simply 'tax avoiders', is wildly wrong,” Zorbas said.

He further pointed to continuing uncertainty over which states would charge stamp duties for businesses that restructure out of trusts.

“We do know the bill could run into the hundreds of thousands of dollars for some, trapping businesses into choosing double taxation or a massive unbudgeted stamp duty bill,” Zorbas said.

“The fact that this was announced by the federal treasurer prior to any conversations with the states around stamp duty shows either profound ignorance of the realities of being an employer or contempt for Australia's aspirational job creators.

Following the latest cash rate rise, RBA governor Michelle Bullock said the accelerated decline in new lending for investors compared to previous interest rate increasing cycles “suggests that there's something else going on here – and that something else going on is the tax changes".

“The [RBA] governor was right about the taxes in general – there is something else going on here,” Zorbas said.

“We call on the parliament to fix it. We call on the parliament to reject the changes to discretionary trusts in their entirety.”

Master Builder Australia national director, policy and legal, Melissa Byrne underlined during the hearing that the costs involved could be significant. For a small, family-owned construction business with a taxable income of $400,000, the reforms could see tax increases of up to 70 per cent annually, ongoing compliance costs of between $21,000 and around $67,000, and a one-off restructuring cost of between $82,000 and $175,000.

“It is unrealistic to expect small businesses to absorb costs of this magnitude without significant consequences. Independent modelling shows the budget's other measures will lead to fewer homes, higher rents and a reduction in construction jobs. This will make it even worse,” Byrne said.

Byrne said the trust tax reform could be described as one of the most significant changes to Australia’s tax arrangements since the introduction of the GST.

“However, unlike the current reforms, the move towards the adoption of GST was accompanied by substantial public education, transitional support, lead times and government assistance to help businesses adapt,” she said.

“It is disappointing that, in contrast, the government appears to assume that businesses can rapidly alter longstanding ownership structures with minimum disruption to ongoing operations.”

Byrne said Master Builder Australia is calling for the trust tax changes to be “abandoned”, or alternatively, the legislation to include grandfathering and a carve-out for existing arrangements for small businesses.