The federal government has introduced a solution aimed at assisting small businesses concerned about the potential state stamp duties incurred during the restructuring of discretionary trusts to circumvent the proposed minimum tax. This new approach allows businesses to reorganize their operations without altering their trust structures, thus avoiding the tax as long as their distribution patterns remain unchanged.
The draft legislation, which is currently available for public consultation for a duration of two weeks, seeks to address the apprehensions of small businesses regarding stamp duty obligations while restructuring in light of Labor’s minimum tax on discretionary trusts. Treasurer Jim Chalmers announced the proposed workaround, which aims to alleviate the financial burden on these businesses.
Feedback on the draft laws, which lay out the framework for the 30 percent tax on discretionary trusts, was released on Thursday. This tax represents the final significant amendment to the tax system stemming from the federal budget released in May.
Concerns over the implications of stamp duty arose during discussions with the government, with the small business advocacy group COSBOA expressing that those utilizing discretionary trusts could face “an impossible choice between a higher tax burden or a costly restructure.”
Stamp duties are levied by state and territory governments whenever there is a transfer or transaction involving property. Since financial assets are classified as property, any restructuring undertaken by small businesses typically activates stamp duty obligations. Many businesses are anticipated to restructure to evade the new trust tax.
The proposed tax specifically targets discretionary trusts, which are financial arrangements that grant owners the ability to allocate income among various companies and beneficiaries flexibly over time. The government contends that these trusts are often employed to minimize tax liabilities.
Transitioning to a corporate structure or a “fixed” trust, which distributes income in predetermined amounts, would relinquish the benefits of flexibility but allow trustees to sidestep the new tax. However, this transition could be financially burdensome. The budget documentation indicated that “rollover relief” would be available for “small businesses and others.” Unfortunately, previous federal rollover initiatives have not addressed state stamp duties, focusing solely on federal income taxes.
In an effort to resolve the stamp duty dilemma, the government had signaled its intent to find a solution and invited suggestions during the consultation phase. Nevertheless, responses from state treasurers have been mixed, with some expressing reluctance or outright opposition to the idea of waiving stamp duties.
This latest workaround aims to prevent the triggering of a stamp duty event by permitting small businesses to retain their discretionary trusts while opting out of exercising their discretion. Instead of converting to a fixed trust, which would activate stamp duty, the proposed legislation allows trustees to opt for fixed distributions to their current beneficiaries, thereby exempting them from the trust tax as long as they maintain this fixed approach.
Additionally, the proposed changes would exempt from the tax any contributions made from discretionary trusts to registered charities, deductible gift recipients, or organizations that are exempt from income tax, such as religious institutions or sporting clubs. This exemption addresses concerns voiced by some trustees that charitable donations might be discouraged without such provisions.
The trust tax is scheduled to take effect in mid-2028, one year later than changes related to capital gains and negative gearing. Numerous exemptions are included, such as those for superannuation funds, disability trusts, deceased estates, testamentary trusts, charitable trusts, and agricultural income.
Business organizations have also called for assistance in managing the legal and financial advisory costs associated with restructuring. Andrew McKellar of the Australian Chamber of Commerce and Industry (ACCI) highlighted in July that these expenses can be “extensive… not to mention the serious costs in time and stress.” The consultation period for the draft legislation will conclude on September 18.
