850,000 family trusts face $2.8b advice bill under proposed minimum tax regime

CPA Australia has urged the Government to address major uncertainty and compliance concerns in its proposed 30 per cent minimum tax on discretionary trusts, warning taxpayers could incur up to $2.8 billion in professional advice costs simply to determine how the regime applies to them.

Australia's largest accounting body supports the policy objective but in today’s submission to Treasury outlines key elements that risk creating unintended consequences for family businesses, trustees and beneficiaries.

Under the exposure draft, discretionary trusts in existence on 1 July 2028 may elect into a regime that avoids both the minimum tax and the need to restructure into a company. The election can only be made once during the 2028-29 income year and cannot be reversed.

Tax Lead Jenny Wong said the measure reaches far more taxpayers than Treasury's estimates suggest.

"Treasury has costed this on around 350,000 small businesses. But 850,000 discretionary trusts lodge a return each year, and every one of those trustees has to decide whether to elect – because if you don't decide, you've decided.

"On our modelling, the cost of professional advice alone is between $2 to $2.8 billion. That's incurred before anyone restructures, and whether or not a single trust elects. It's the cost of working out the answer, not the cost of complying with it.

"This isn't the cost of paying the tax. It's the cost of working out what to do about it.”

CPA Australia said the proposed Election to Exclude Trusts (EET) is a genuine attempt to provide family businesses with an alternative to restructuring into a company. However, the legislation provides no certainty that making the election will not trigger state or territory stamp duty.

While explanatory materials state duty is "not expected" to arise, no legislative provision guarantees that outcome and no state or territory government has formally agreed to it.

"A family business shouldn't have to guess how state duty law will treat a decision it can never undo," Ms Wong said.

CPA Australia has written to all state and territory Treasurers urging them to clarify their position and work through the issue with the Commonwealth.

"This is a coordination problem, not a policy disagreement, and there are more than 21 months to fix it,” Ms Wong said.

The submission also identifies design features that could result in some beneficiaries paying more tax than their own marginal rate.

Under the proposal, beneficiary credits would not be refundable. CPA Australia modelling shows a beneficiary whose only income is a trust distribution could lose $9,748 a year on distributions between $45,000 and $135,000.

"That's the same amount whether you're on $50,000 or $130,000, and the measure raises revenue from nobody else. An adult child studying full-time and a retired beneficiary with no other income are treated exactly the same as someone in a genuine income splitting arrangement. The provision looks at the rate, not the reason."

CPA Australia also warned that the gap could widen over time because the proposed minimum tax is fixed at 30 per cent, while personal income tax rates may change.

"Each time personal tax is cut, a beneficiary of a minimum tax trust falls further behind a wage earner on the same income, without anyone having decided that should happen. That will need to be considered in any future reform to personal income tax thresholds,” Ms Wong said.

CPA Australia’s submission argues that denying the credit to family companies is driving much of the disruption associated with the reforms.

"If a family company could simply receive the credit, that income would be taxed at 30 per cent where it already sits. A great many of these businesses would have no reason to elect and no reason to restructure at all. One change would take most of the problem away."

CPA Australia is calling on the Government to better target the beneficiary credit, align the minimum rate with future personal tax changes, make the offset available to corporate beneficiaries, provide legislative certainty around the EET election, resolve stamp duty issues before taxpayers are required to make an irrevocable choice, and make restructuring costs immediately tax deductible.

"We accept the policy objective. It can be achieved without taxing people above their own rate, and without this level of cost and uncertainty," Ms Wong said.

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Adrienne Biscontin
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