‘Why penalise small businesses?’ Labor’s $45b trust tax escape hatch slammed for stripping flexibility

The Federal Government has offered nearly 250,000 small businesses a way around its $45 billion trust tax without dismantling their structures, but the nation’s peak business lobby says the fix would gut the flexibility that made discretionary trusts worth having.

Draft laws released on Thursday would let existing trusts escape the 30 per cent floor by naming beneficiaries and locking in each person’s share of future distributions.

The concession retreats from an original plan that threatened to push firms into companies or fixed trusts, forcing owners to reopen loans, licences, insurance and contracts. Businesses in WA and Queensland transferring dutiable assets also risked a hefty stamp duty bill.

Australian Chamber of Commerce and Industry chief executive Andrew McKellar branded the measure a fresh blow when the slowing economy badly needed business investment.

“The government can’t harvest that huge amount of money without leaving small businesses poorer and less competitive,” he said.

“These changes impose higher taxes on small businesses structured as trusts, and can also force these small business owners to cop big costs to restructure.”

Mr McKellar said few firms could use the exemption because it forced owners to lock in who received the money and in what proportions, defeating the point of a discretionary trust.

“The Federal Government continues to ignore clear calls from across the business community to stop this big hit on small business,” he said. “The government is yet to answer the question: why penalise small businesses?”

Treasurer Jim Chalmers cast the tax as a question of fairness.

“We’re delivering a fairer tax system and helping fund tax cuts for workers by better aligning the tax rate on trust income with tax rates paid by workers,” he said.

Under existing rules, trustees can decide each year which eligible beneficiaries receive the income, with each person paying tax at their marginal rate.

From July 1, 2028, the trustee would instead pay enough tax to bring the rate on trust income to at least 30 per cent. Individual and other non-corporate beneficiaries would receive a non-refundable credit but any amount left after meeting their own tax bill would be lost.

The choice would fix proportions rather than dollar amounts. A trust promising a husband and wife 50 per cent each could keep that split whether it earned $100,000 or $1 million.

It could not switch to an 80-20 split the following year if one person took over the business, another retired or the family’s circumstances changed. Breaking the promised split would revoke the election and could expose the trustee to tax at 47 per cent.

ACCI says nearly 240,000 small businesses operate through discretionary trusts. The Government says fewer than one in 10 of Australia’s 2.7 million active businesses would be affected in any year.

Those rejecting the lock-in could use a three-year Commonwealth restructuring rollover from July 1, 2027. It could prevent an immediate federal income-tax or capital-gains-tax bill, but would not cover State duties.

The government has also narrowed the tax after warnings its first design swept too broadly.

A new definition would spare widely held trusts, managed investment trusts, bare trusts and employee share trusts. Genuine testamentary trusts and deceased estates would be excluded, ending the much-criticised ‘widow tax’ debacle.

Distributions to registered charities and deductible gift recipients would be exempt and excess franking credits could be refunded. A proposed cap for other tax-exempt bodies, including sporting clubs, remains undecided.

Consultation closes on September 18.

The original measure was forecast to raise $44.9 billion over nine years, but the Government did not say how much would survive its new exemptions.