Cosboa says new legislation on discretionary trust taxation would reduce the impact on SMEs compared with the Government’s original proposal, but issues remain around restructuring costs and the flexibility of existing trust structures.
In the May Budget, the Government proposed a new 30 per cent minimum tax on discretionary trusts, estimated to raise almost $4.5 billion a year by the end of the decade.
The proposal raised concerns among businesses, with around 494,000 companies operating through trusts potentially facing restructuring and related stamp duty costs.
Under the draft legislation, discretionary trusts existing by July 1, 2028 can elect to make fixed distributions to pre-nominated beneficiaries, including individuals, eligible companies and trusts.
Trusts using the regime would avoid the 30 per cent minimum tax and would not need to restructure. They could also distribute future income to an eligible company, with the income taxed under the company’s rules.
The option reflects a fallback proposal Cosboa put to the Government after opposing the original changes. It would allow eligible businesses to retain their existing trust structure rather than restructure into a company or fixed trust.
“For businesses that can maintain fixed distributions, this provides a pathway to continue operating through their existing trust structure without being subject to the minimum 30 per cent tax treatment,” Cosboa CEO Skye Cappuccio said.
However, that option would limit changes to beneficiaries, with new or existing beneficiaries able to be changed only in certain circumstances, such as death or family breakdown. Trustees could also revoke the decision, while distributions inconsistent with it would attract the highest marginal tax rate plus the Medicare levy.
Calls for further changes
The limits on flexibility could affect family trusts, where distribution arrangements can be relevant to succession planning.
“While the overall changes are a meaningful improvement, they don’t change our view that the broader policy is flawed,” Cappuccio said.
Trusts that do not qualify for or elect into the regime may need to restructure into a company or fixed trust. The Federal Government would provide three years of rollover relief for income tax and capital gains tax consequences arising from restructuring, but not state and territory stamp duty.
Australian Industry Group CEO Innes Willox said Queensland and Western Australia impose stamp duty on some business assets, including goodwill, stock, plant and equipment.
For example, a business with $5 million in land and $5 million in other assets could face more than $500,000 in stamp duty in either state.
Small Business and Family Enterprise Ombudsman Lynda McAlary-Smith previously said restructuring costs had been underestimated and called for stamp duty exemptions on asset transfers arising from the reform.
The draft legislation would also exclude charitable trusts and distributions to registered charities, deductible gift recipients and some income-tax-exempt organisations, such as sporting clubs, from the minimum tax, subject to a cap to be finalised through consultation.
Cosboa said the changes address some concerns but called for further changes to the rules governing beneficiaries and distributions.
The Government has not disclosed the budget impact. The draft legislation is open for consultation until September 18, with the Government intending to pass it into law before Christmas.
This article was first published on Inside Small Business.
