Discretionary trust tax: a new barrier to Australia's housing supply

The cost of a business restructure in the industry can place additional pressure on a building company's ability to comply with onerous state government prudential requirements. 

The association said it was concerned that the proposal would reduce economic efficiency, undermine tax neutrality, and add complexity and uncertainty. 

Regarding the construction sector, HIA indicated significant implications, particularly for residential builders, noting commercial risks including: contractual disputes, defect and warranty claims, insolvency within supply chains, project delivery risks, personal guarantee requirements, fluctuating market conditions, long project timeframes and significant cash-flow commitments. 

HIA managing director, Jocelyn Martin, demonstrated the concerns of Australians wanting a house, but noted the government proposed regulations, seemingly making it more difficult. 

“The proposal highlighted a growing contradiction at the heart of the government's economic agenda,” Martin said. 

"Every week governments tell Australians they want more homes.

“Every month it seems there is another tax or piece of regulation that makes building them harder.” 

Moreover, the association further observed that, in contrast to major corporations, boutique enterprises typically lack the substantial in-house financial, legislative, and fiscal departments required to navigate such shifts. 

Consequently, the administrative burden of deciphering and implementing complex tax modifications would impose a disproportionate burden on these smaller-scale builders, including increased compliance costs, administrative burdens, and business uncertainty. 

“The extraordinary aspect of the proposal is that Treasury's own consultation paper acknowledged it would increase compliance costs, require businesses to restructure and create additional complexity,” Martin said. 

“Discretionary trusts aren't some exotic tax vehicle … they're one of the most common ways family-owned building businesses are structured.

“A local builder might operate through a trust because it allows a husband and wife to run the business together, brings adult children into the business as they prepare to take it over, or provides the flexibility small businesses need when workloads and income fluctuate from year to year.”

The association noted that the paper repeatedly discussed rollover relief through the small business restructure rollover as if restructuring is almost frictionless. 

However, in reality, the association indicated that businesses would incur: state stamp duty, legal fees, accounting fees, valuation costs, changes to trust deeds, payroll and accounting software changes, ongoing compliance for companies and more. 

"The government says this is about fairness, but the practical reality is a builder who wants to employ another apprentice or invest in new equipment could instead be paying accountants, lawyers and stamp duty simply to states and territories to restructure their business – that doesn't build a single extra home,” Martin said.