The MFAA has said the federal government’s new discretionary trust tax plan may punish businesses unless carve-outs and transition rules are improved.
The Mortgage & Finance Association of Australia (MFAA) has told the federal government that its proposed 30 per cent minimum tax on discretionary trusts should be narrowed to avoid unduly disrupting broker businesses that use trusts for commercial reasons.
The MFAA said many brokers operated through trusts for reasons that had little to do with tax minimisation and stated that those structures should not be treated the same way as arrangements set up primarily to reduce tax.
That point sits at the centre of the association’s first recommendation, which is that Treasury exclude or grandfather genuine small business trading trusts from the new tax.
“Just as the measure excludes genuine testamentary trusts because they serve legitimate purposes beyond tax outcomes, Treasury should adopt a similarly principles-based approach when determining the scope of discretionary trusts captured by the minimum tax,” the submission said.
The MFAA said this would help ensure “genuine small business trading structures are not inadvertently affected”, warning that owners were making long-term decisions in the midst of a broader tax reform package.
It said Treasury should weigh up the wider economic and productivity consequences “where legitimate businesses may need to choose between maintaining an appropriate commercial structure and accepting a higher tax burden”.
The association said it backed the Council of Small Business Organisations Australia’s call for small businesses with aggregated turnover below $10 million to be grandfathered if the measure goes ahead.
Restructuring is not simple, says MFAA
The MFAA also stressed that mortgage and finance broking businesses operated in a highly regulated environment, which it said made any structural change more complicated than a standard tax decision.
“For regulated businesses, restructuring is a significant operational exercise that extends well beyond the tax system,” the MFAA said.
The association added that existing aggregator, lender accreditation, and licensing arrangements could limit what a broking business could actually do if it wanted to move out of a trust structure.
It said that in some cases, shifting the business to a company could require fresh contractual, accreditation, and licensing arrangements and may not preserve the succession planning or continuity benefits the trust was originally set up to deliver.
The association said the final design of the reform and its transition arrangements needed to reflect those realities and avoid unnecessary disruption for businesses.
The MFAA stated that it backed the use of the existing small business restructure rollover, but added that the relief needed to be simple, practical, and widely accessible.
“The practical implications of restructuring extend well beyond taxation. Mortgage and finance brokers help businesses obtain and maintain finance every day and, as trusted advisers, play an important role in helping business owners understand the lending implications of changing their legal structure,” the submission said.
The submission also highlighted the potential lending complexities the changes could create.
“Restructuring from a discretionary trust to another entity is not simply a transfer of the business,” the MFAA said.
“Existing lending arrangements may need to be reviewed, and depending on the lender’s requirements, may involve lender consent, refinancing or varying existing facilities, replacing guarantees and security arrangements, or amending lease and equipment finance documentation.”
It added that businesses may be reassessed against current lending policies rather than the ones that applied when their original finance was approved, creating “additional cost, delay and uncertainty”.
The MFAA’s final recommendation was for Treasury and the Australian Taxation Office (ATO) to publish detailed guidance well before the new tax commences.
[Related: Treasury releases trust tax change discussion paper]
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