CAFBA has warned that the government’s revised discretionary trust plan still leaves small and family businesses facing a difficult choice between trust flexibility and a higher tax burden.
The Commercial & Asset Finance Brokers Association of Australia (CAFBA) has welcomed the government’s revised proposal for taxing discretionary trusts, but warned that the exposure draft still left small and family businesses facing a challenging choice between trust flexibility and a higher tax burden.
The draft legislation, released by Treasurer Jim Chalmers on 3 September, follows widespread concern from business and industry bodies that the government’s original minimum-tax plan could compel hundreds of thousands of businesses operating through discretionary trusts to alter their structures, potentially incurring legal, accounting, administrative and state stamp-duty costs in the process.
While the government has now proposed an election mechanism intended to protect existing structures from that outcome, CAFBA has maintained that the proposed 30 per cent minimum tax remains “fundamentally flawed”.
Yet CAFBA chair of advocacy David Gandolfo OAM said the exposure draft represented a material improvement on the original budget-era proposal, particularly because it recognised the practical disruption that could arise if established businesses were required to restructure.
“We welcome the fact that the Government and Treasury have listened and provided a pathway that may allow many established businesses to retain their existing trust structures without being subjected to the proposed 30 per cent minimum tax,” Gandolfo said.
“For many small and family businesses, discretionary trusts are longstanding and legitimate business structures. They have been established for sound commercial reasons and play an important role in managing business risk, investment and succession planning.”
Under the revised framework, discretionary trusts in existence on 1 July 2028 would be able to opt into a new arrangement under which income is distributed at fixed percentages among beneficiaries nominated in advance.
The nominated group could include individuals, companies and eligible trusts.
Rather than being taxed under the proposed 30 per cent minimum-tax treatment, income distributed in accordance with the election would generally be taxed in the hands of the recipient at the applicable individual marginal tax rate or company tax rate.
The government has presented the election as a way to provide certainty while allowing existing trusts to retain assets and ownership arrangements.
Trustees would be able to nominate a broad class of eligible recipients when making the election, reducing the need to transfer assets or remake longstanding business structures simply to respond to a tax-law change.
Restructuring can extend beyond a technical tax exercise, potentially involving changes to ownership, financing documentation, guarantees, professional advice and transaction costs.
Gandolfo said forcing a restructure would impose substantial costs without delivering benefits to the broader economy.
“Forcing businesses to restructure simply because the taxation rules have changed could impose substantial accounting, legal and administrative costs without generating any corresponding improvement in productivity or economic activity,” he said.
“This exposure draft is therefore a better outcome than the original proposal, but a better version of a bad policy doesn't make it good policy.”
Fixed distributions remain a concern
CAFBA’s principal concern is that access to the election depends on fixing distribution proportions between beneficiaries, a condition the association said undermined the central commercial feature of a discretionary trust.
Discretionary trusts are commonly used because trustees can adapt distributions as business conditions, income needs, family arrangements, investment priorities, ownership interests and succession plans develop.
Under the draft model, nominated beneficiaries could only be added or changed in limited situations, including the death of a beneficiary or family breakdown.
Gandolfo said the revised rules could leave businesses constrained when their circumstances changed in ways not considered when the election was made.
“Family businesses evolve. Ownership, management, family circumstances and succession arrangements change over time, and the flexibility of discretionary trusts allows businesses to respond to those changing circumstances,” Gandolfo said.
“Businesses should not have to choose between retaining that flexibility and avoiding an additional tax burden.”
Concerns over revocation penalty
CAFBA has also criticised the consequences attached to revoking an election or making distributions that are inconsistent with it.
A trustee may revoke an election, and it would also be automatically revoked where a trust makes a distribution that does not comply with the elected fixed arrangement.
But in either case, the trust’s taxable income for that year would be subject to the top marginal tax rate plus the Medicare levy, rather than the proposed 30 per cent minimum-tax treatment.
Gandolfo said the consequence appeared disproportionate, particularly where a business’s commercial or family circumstances had changed after it entered the arrangement.
“That appears unnecessarily punitive,” he said.
“A business should not face a significant tax penalty simply because its circumstances change and an arrangement that was appropriate at one point in time is no longer appropriate.”
CAFBA argued that the rules should support businesses’ capacity to plan, invest and respond to change rather than drive structural decisions primarily for tax purposes.
“Tax policy should encourage investment, entrepreneurship and business growth. It should provide certainty and allow businesses to make decisions based on sound commercial considerations rather than forcing them to reorganise their affairs primarily in response to tax policy,” Gandolfo said.
“CAFBA remains of the view that the proposed minimum tax on discretionary trusts is the wrong policy approach.”
[Related: Treasury makes major amendments to discretionary trust legislation]
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