FAAA, SIAA criticise tax changes to discretionary trusts

The 30 per cent minimum tax rate on discretionary trusts will cause an unnecessary burden on small businesses, both the Financial Advice Association Australia and Stockbrokers and Investment Advisers Association have argued.

In a submission to Treasury’s consultation on minimum tax on discretionary trusts, launched after the federal government announced a suite of changes to how investment income was taxed, the Financial Advice Association Australia said many businesses would have to transition to a company structure as the 30 per cent minimum tax on trusts is higher than the small business rate of 25 per cent.

The FAAA said its members have criticised the change, noting that trusts are used for other reasons than tax including asset protection, succession planning, family ownership arrangements and business continuity.

“Many affected small businesses will be forced to actively consider making a change, which will be a costly and time-consuming exercise for many of them,” said the FAAA submission, signed by chief executive Sarah Abood.

“Converting discretionary interests into fixed company shareholdings may materially alter control, succession, asset protection and economic entitlements. These consequences can be difficult and costly to reverse and may not be adequately addressed through rollover relief alone.”

The association said advisers would be doubly impacted as both business owners and professionals helping business owners.

It also noted complaints from members over rollover relief, arguing it should be five years rather than three.

“Given the high level of uncertainty, the significant implications of these changes, and the large numbers of small businesses affected, many of our members are strongly of the view that three years is not enough for this transition period,” the submission said.

SIAA had similar criticisms to the changes.

“The announced targeting of the equalisation of tax across personal exertion income and passive investment income is likely to impact lower income individuals and overall, not increase the net tax take from this measure,” said the SIAA submission, signed by CEO Maria Lykouras.

“A significant proportion of the capital held in discretionary trusts has already been contributed from post-tax income.”

SIAA said that because of Australia’s progressive tax scale, it means the median effective tax rate is below 30 per cent and typically around 25 per cent.

For this reason, the 30 per cent threshold – based on the marginal rate for income earned between $45,001 and $135,000 – isn’t an alignment to the tax rate of workers and instead impacts ordinary families and small businesses rather than a narrow set of high-wealth arrangements the measure aims to target.

Furthermore, both associations noted that the actual minimum rate would be 32 per cent including the Medicare levy.

“At a time when regulatory red tape is a central productivity issue for wealth advisers, this complex new law is unwelcome.”

The Albanese government announced as part of the May federal budget that it will roll back the 50 per cent capital gains tax (CGT) discount across all asset classes and negative gearing concessions on investment properties.

Instead, the 50 per cent CGT discount will be replaced by cost-base indexation for assets held for more than 12 months, with a 30 per cent minimum tax on net capital gains.

Negative gearing will be retained on new builds and grandfathered on existing properties.

Also announced as part of the budget tax reform package was the 30 per cent minimum tax introduced on taxable income from discretionary trusts from 1 July 2028, which is estimated to increase tax revenue by a further $4.5 billion over the five years.

Beneficiaries, other than corporate beneficiaries, will receive non-refundable credits for the tax payable by the trustee.

Since the announcement, the government has made several concessions, but has also stopped SMSFs from borrowing to invest in residential property.

Minister for Financial Services Daniel Mulino defended the changes in this week’s federal budget to capital gains tax across all asset classes and negative gearing, arguing it would end market distortions since its introduction over a quarter century ago.