Estate planning lawyer Rachael Rofe warns Labor’s new tax on trusts will compromise asset protection

Australian small businesses and families would lose the ability to protect their assets and change how they are divided under Labor’s new proposed laws to impose a minimum 30 per cent tax on trusts, an estate planning lawyer says.

With Parliament resuming, the Federal Government is expected to introduce legislation this week to introduce a minimum 30 per cent tax on family and discretionary trusts from July 1, 2028.

To avoid paying this tax, trusts would have the option of fixing distributions to pre-nominated beneficiaries, but they would lose the ability to alter how assets are divided up, an exposure draft said.

Estate planning lawyer Rachael Rofe, the principal solicitor of Rofe + Co, said imposing new income and capital gains taxes on trusts unless they fixed their distributions removed essential asset protection and forced trusts to pay out money to estranged individuals, including in cases of divorce or drug addiction.

“Suddenly, you are being forced to pay out income and capital to the beneficiaries no matter what their circumstances are,” she told The Nightly.

Small businesses that rely on family trusts for succession planning would be particularly vulnerable.

“It will compromise the asset protection of the trusts which is what so many small businesses rely on and why they use these trusts in the first place,” Ms Rofe said.

The change also affects testamentary trusts created in a will, which Ms Rofe said would create extra work for lawyers.

“Lawyers might love it but it’s not fair for the everyday mum and dad who have to bear the expense of re-drafting their will,” Ms Rofe said.

“There’s also a whole bunch of people who may have lost mental capacity and can’t re-draft their will.”

Australian Chamber of Commerce and Industry chief executive Andrew McKellar is calling on the Federal Government to reconsider the legislation, first flagged in the May Budget, arguing it was an unfair way of cracking down on tax avoidance.

“We can’t have a situation where small business becomes the punching bag of government,” he told reporters in Canberra on Monday.

“The trust tax that government has proposed to implement will hit 240,000 small businesses.

“That’s pharmacies, small retailers, it’s small and medium sized home builders, cafes, restaurants, and many more small businesses who operate with such structures.”

Shadow treasurer Tim Wilson, who has flagged introducing legislation this week to repeal Labor’s proposed changes, said this would simply cause more chaos and administrative burdens for small businesses.

“The Government doesn’t understand what it’s doing and the impact this is going to have, particularly on small business. They really need to abandon it, otherwise they’re going to cause further economic chaos,” he told ABC Radio National.

“What they’re going to do is apply higher taxes on struggling small businesses or force them to change structures, which is going to incur massive costs, stamp duty liabilities, and then create chaos with financing as they have to go back to the banks and get things restructured.”

Labor started also consultation with its tax changes after announcing them in the Budget.

“They didn’t take them to the last election. In fact, they said 50 times over they wouldn’t make these changes,” Mr Wilson said

“The second reason is that the Government has consistently now bungled the implementation of its changes.”

Labor in June announced a carve-out for discretionary testamentary trusts, used for estate planning purposes and deceased estates to protect an inheritance following a death, following an outcry.

The Government has since the Budget also dumped plans to impose a capital gains tax on tech start-ups and remove negative gearing benefits from widows or widowers inheriting an investment property.