‘Revenue grab:’ practitioners slam 30% trust distribution tax

Jenny Wong, tax lead at CPA Australia, said such a policy would amount to a “revenue grab,” adding that the timing and lack of detail were causing panic and uncertainty amongst practitioners.

“To impose a blanket rate that sits at the higher end of tax rates in Australia isn’t about restoring equity – it risks introducing a punitive regime,” Wong said.

“Trusts are not easily unwound and have a multitude of non‑tax purposes for their establishment. They are sitting ducks for the government to raise revenue, and the sudden imposition of a high tax rate on assets trapped in these structures is an unreasonable proposition.”

She said that trusts were a “legitimate and long-standing structure” utilised by small businesses, tradies and farmers for asset protection, succession planning and risk management.

A 30 per cent minimum tax would result in low and middle-income recipients paying more tax than if they had earned that income directly, Wong added.

“An effective personal income tax rate of 30 per cent typically applies to taxable income nearing $200,000, yet millions of middle‑income Australians receive trust distributions as part of normal business and investment activity,” she said.

John Storey, tax counsel at The Tax Institute, raised similar concerns about fairness.

"A sudden change in direction to address a government revenue problem has the potential to be disruptive, unfair and is an example of the type of policy that has led to our tax system being a complicated, inefficient mess," he said.

"Trust structures are some of the most popular and widely used vehicles for small businesses, investors, families and farmers. They are popular not because people aim to avoid their tax obligations, but successive governments for years have encouraged the use of trusts."

Tony Greco, senior tax adviser at the Institute of Public Accountants (IPA), said trusts had been a target for many years, particularly the ability to distribute income to beneficiaries to minimise tax on family groups.

However, if the concessions were to be wound back, he said this would not remedy structural issues in Australia’s tax system, including an over-reliance on income tax.

“Even if all these concessions are wound back, it does not amount to the heavy lifting required to reform our tax base to reduce the burden on workers in Australia,” Greco said.
 
“These low-hanging fruit targets will do little in shifting the tax mix away from personal income tax in a meaningful way.”

If the government were to move ahead with this policy, Wong said industry consultation would be “critical” to ensure that new measures didn’t spark unintended results in Australia’s complex tax system.

“A minimum tax on trust distributions may sound simple in theory, but trust taxation is highly complex in practice. Without careful design, broad reforms can create unintended outcomes including double taxation, increased compliance costs and uncertainty for small business and family enterprises,” she said.

“Without careful interaction with Australia’s dividend imputation system, there is a real risk taxpayers could face tax outcomes well above the stated 30 per cent minimum rate.”

Storey echoed this sentiment, saying that reform should be undertaken only after genuine consultation with affected stakeholders. He added that broader reform of trust taxation would be welcome, but needed to be approached holistically.

"The taxation of trusts does need reform. It is complex, outdated, and creates unnecessary compliance costs. We currently have a case before the High Court of Australia, the Bendel decision, where the legal consequences of a trust distribution are being debated. It would be wrong to build on these rickety foundations even more complex rules," he said.

"Making changes to trust taxation settings should be done as part of a holistic package that looks at business entity taxation more broadly, minimises business disruption and gives the tax profession and industry a chance to work with the government to get the best outcome that will promote productivity and growth."