Trust tax bill improved, but still not ready for family businesses

• Government delivers improvements since the Budget, including a more flexible election that lets family businesses avoid restructuring
• Key issues must be resolved, including rigid election rules, double taxation risks, unfinished regulations and stamp duty uncertainty
• CPA Australia calls for the Bill to be paired with a simplification bargain: fix the family trust rules, release the Board of Taxation's red tape report and set a target to cut compliance costs

The trust tax legislation introduced into Parliament today is materially better than the policy announced in the Budget, but it does not yet fix the design problems that will decide whether it works for family businesses, CPA Australia says.

CPA Australia Tax Lead Jenny Wong said the Government had responded to concerns raised by the profession and the business community by introducing a more flexible election to allow many family trusts to avoid costly restructures.

"Government has listened, and this Bill is better for it. But better isn't the same as ready,” Ms Wong said.

“Family businesses are still being asked to make decisions they can't take back before the rulebook is complete.

"We support dealing with inappropriate income splitting. The test has always been whether the design does that simply, fairly and in proportion. On that test, there is still work to do."

CPA Australia welcomed several improvements made through consultation, including greater flexibility in the election process.

“Existing family trusts can elect to fix their beneficiaries' shares and stay outside the minimum tax without restructuring,” Ms Wong said.

“Today's Bill makes that election more flexible.

“Charities can be nominated as a group, capital gains and franked dividends can be streamed to nominated beneficiaries. 

“In addition, trusts no longer have to hand out a share of their capital every year, more family companies can be nominated, and the Commissioner of Taxation can forgive honest mistakes that would otherwise end the election,” she said.

The legislation also exempts genuine testamentary trusts, distributions to charities and child maintenance trusts, while providing additional restructuring relief. Excess franking credits can be refunded, and the restructure roll-over includes relief from family trust distribution tax.

Treasury's analysis of the Bill cites CPA Australia's estimate that restructuring a family business can cost between $9,536 and $23,436.

"CPA Australia was among those who showed Government that restructuring could cost family businesses more than the tax itself," Ms Wong said. 

“The election is a sensible answer to that problem, and Government deserves credit for it”

However, CPA Australia notes four key issues still need to be addressed, starting with the election still too rigid for many family situations.

“The election can be made in one year, and shares cannot follow a grandchild born later,” Ms Wong said.

“For example, if a family that elects in 2029 and welcomes a grandchild in 2031 shouldn't have to choose between leaving the child out or losing the election.”

“The Commissioner's new discretion covers honest mistakes, but not a trustee who changes shares because a family's circumstances have changed. That change, or simply leaving the election, still taxes all of the trust's income for the year at the top rate.”

Second, family companies may still be subject to effective double taxation. Income is taxed at 30 per cent in the trust, then again in a family company, with no credit for the first tax.

Third, the rulebook is unfinished, and growing. 

“The Bill leaves 12 rules to be made later by the Minister, up from 10 in the draft law,” Ms Wong said. 

“Five of those rules can work against taxpayers, and none has been released to date, even in draft. 

“Collection, reporting and integrity rules are left to later legislation, and ATO guidance is not expected until after the law passes. Yet the restructure roll-over opens on 1 July 2027, and choosing it cannot be reversed.”

Fourth, the legislation does not resolve the stamp duty implications for businesses that choose to restructure or the need for a new entity to reapply for licences. 

“The restructuring costs go well beyond tax,” Ms Wong adds. 

1. An opportunity to simplify

CPA Australia said the reform should be used as part of a longer-term simplification of trust taxation, but only if Government retires old rules as it adds new ones. 

“A 30 per cent floor reduces the reward for directing income to low-rate beneficiaries, which is the problem many existing integrity rules were written to police,” Ms Wong said.

"Don't just add a new layer to the tax system. Use this opportunity to simplify and remove old layers.

"If Government wants the profession and family businesses to see the longer-term simplification case for this reform, it has to complete the other half of the bargain."

2. Fix the family trust rules at the same time

CPA Australia points out that under the existing family trust rules, a distribution outside the family group can attract family trust distribution tax at 47 per cent. There is no time limit on assessing it, and no discretion for honest mistakes.

“The government itself recognises the problem. It lets the Minister make special roll-over rules for families whose trustee administered a family trust election under a genuine misunderstanding,” Ms Wong said.

“But that relief applies only to trusts that restructure, and only once the Minister makes the rule.

"Parliament is about to rewrite how family trusts are taxed. It would make no sense to leave a 47 per cent trap, with no time limit, sitting in the old rules.”

CPA Australia is calling for a limited review period for the tax, a Commissioner's discretion for genuine errors, a way to correct historical election mistakes for every family trust, not only those that restructure, and a targeted Board of Taxation review of the family trust rules. 

The changes should be legislated with the next tranche of the trust reforms.

3. Cutting red tape 

CPA Australia estimates Australians spend around $60 billion a year complying with the tax obligations, while Treasury estimates the trust measures in this Bill will add a further $141.5 million a year with about $940 million in one-off implementation costs, before any of the rules still to come. 

The Board of Taxation's Red Tape Reduction Review has been with the Treasurer since 30 June.

"Every major tax reform should leave the system simpler than it found it. Every hour a business owner spends on tax paperwork is an hour not spent on customers, staff or investment," Ms Wong said.

CPA Australia is calling on Government to publish the Board's report within three months, to set a target of cutting tax compliance costs by 10 per cent by 2030, and to update the compliance cost estimate for this Bill once the remaining rules are released.

4. Stamp duty: the issues yet to be resolved

CPA Australia points out that, according to today’s Bill, the election lets a trust stay outside the minimum tax without transferring any assets. 
The Treasurer told Parliament today that it is not expected to trigger state and territory stamp duty, but duty is a matter for each state and territory, and none has yet confirmed its position publicly.

A business that restructures into a company or fixed trust is in a different position. The Commonwealth roll-over covers income tax and capital gains, not state transfer duty. 

A new entity may also need to reapply for licences and renegotiate its lease, insurance and finance. Treasury's compliance cost estimate for the Bill does not count stamp duty.

"A Commonwealth roll-over can't waive a state tax. The Commonwealth and the states need to settle this before the roll-over opens in July 2027 and we’ve written to all the States and Territories," Ms Wong said.

If they cannot agree, CPA Australia says unavoidable duty on restructures should receive upfront Commonwealth tax recognition.

CPA Australia says the Bill should go to a Senate committee inquiry, where it will put forward these proposals.

"CPA Australia wants this reform to work. If Government fixes the remaining design problems, cleans up the legacy family trust rules and uses this moment to genuinely reduce red tape, family businesses could be left with a tax system that is simpler than the one we started with," Ms Wong said.

 

Media contact

Camille Hanton
External Affairs Lead
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0431 180 475