Business owners across the New England North West are being urged to speak to their advisers as a federal crackdown on discretionary trusts threatens to add thousands of dollars to their costs.
Laws introduced to federal parliament on Wednesday would bring in a 30 per cent minimum tax on trusts. The measure was flagged in the May federal budget.
The federal government says the large number of discretionary trusts is subverting the tax system and placing a greater burden on workers. Business groups argue trusts are used for legitimate reasons, such as protecting assets.
Asked what the changes would cost small businesses, the government’s answer was thousands of dollars, not tens of thousands.
“It really depends on the kinds of arrangements that a small business has, it depends on the kind of restructuring pathway they undertake,” said Assistant Treasurer Daniel Mulino on ABC’s Insiders program on Sunday.
“It should be towards (the thousands) than the (tens of thousands).”
Assistant Treasurer Mulino estimated there are about 800,000 discretionary trusts, double the number of 25 years ago. The economy-wide cost of the changes is expected to be about $50 million.
“(It’s) a reasonable kind of ongoing cost for adjustment across the economy for a tax reform of this magnitude,” he said.
“At the heart of this reform is the fact that there are a range of options available to some taxpayers in our community that are not available to most, that aren’t available to people who provide their labour.”
Labor will need the support of either the Coalition or the Greens to get the reforms through parliament. The Coalition has come out strongly against the bill and is unlikely to support it, even with changes.
Concerns have also been raised that some people could be forced to pay 60 per cent in tax if they use a trust and other companies for business purposes. The top marginal tax rate is 47 per cent. Assistant Treasurer Mulino said there would be a transition period so businesses could adjust.
“What we’re setting is a very reasonable minimum tax,” he said.
“The 30 per cent is a level that is really to better align taxation through trust income.”
Farmers have been given an exemption. The National Farmers’ Federation is urging all parties and the crossbench to back the decision to exempt primary production income from the minimum tax.
“Trusts are a core business structure used by thousands of family farms to manage risk, protect assets, support succession planning and invest for the long term,” said National Farmers’ Federation President Hamish McIntyre.
“ATO data shows there are more than 37,000 trusts operating in agriculture, fisheries and forestry.”
Closer to home, Business NSW New England North West says the stakes are high for a region built on small and family-run firms.
“New England North West is home to around 21,500 businesses, and small business is the backbone of our regional economy,” said Business NSW New England North West Regional Director Stephanie Cameron.
“Across NSW, around 98 per cent of businesses are small businesses, so changes that create additional tax, compliance or administrative costs have the potential to be felt very widely.”
Business NSW has backed a NSW commitment aimed at heading off a second bill. The Minns Labor Government has pledged that, if re-elected, it would amend existing regulations to clarify that the decision to become an Excluded Election Trust is not a taxable event for NSW stamp duty.
The change would be developed after consultation with small business organisations, which would begin once federal parliament finalises the legislation.
“Regional businesses are already managing significant cost pressures and growing compliance obligations,” Ms Cameron said.
“They should not face an unintended stamp duty bill simply because they need to respond to changes in federal tax arrangements.”
Advisers say the detail matters. Kylie King, a partner in business services at Roberts + Morrow, said the proposed rules involved a new election and nomination process, and there had been uncertainty about whether those steps could create a state duty liability.
“The real issue is whether businesses utilising the Transitional Restructure Rollover will receive sufficient stamp duty relief, particularly where land or other dutiable property is involved,” she said.
“Businesses taking a different route to comply with the new tax rules could still face real restructuring costs.”
Paul Williams, a partner at Roberts + Morrow Legal, said a trust might instead restructure into a company or fixed trust.
“While the Transitional Restructure Rollover can provide income tax and CGT relief for eligible transactions, that does not automatically eliminate stamp duty on every asset transfer,” Mr Williams said.
Ms King urged business owners to act early.
“Use the time available to speak with your adviser, understand whether the proposed rules are likely to affect you and work through the options for your particular circumstances before any decisions need to be made,” she said.
Ms Cameron said the region’s small businesses could not afford more costs.
“For a region dominated by small and family-run enterprises, getting these policy settings right matters.”
“Every additional cost ultimately affects the capacity of regional businesses to invest, employ people and contribute to their local communities.”
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