Proposed tax on trusts will hit small businesses, middle Australia, warns CPA Australia

• Proposed 30% minimum tax on trust distributions a “revenue grab”
• Full design details and consultation with the profession is critical 
• Timing and lack of detail causing panic and uncertainty

CPA Australia has warned that reported plans to impose a 30 per cent minimum tax on trust distributions is a blunt measure that would materially affect small businesses and families, while creating uncertainty just days out from the Federal Budget.

CPA Australia Tax Lead Jenny Wong said the timing was already fuelling anxiety and speculation among businesses, investors and advisers.

“To float the idea of taxing trusts one week out from the Federal Budget is unfair to the millions of Australians who use and are beneficiaries of trusts,” Ms Wong said.

“CPA Australia supports a fair and sustainable tax system, including targeted measures to address inappropriate tax minimisation. However, the lack of clarity around what the 30 per cent tax would entail is causing panic and uncertainty – this is poor policy development.

“It also looks like a revenue grab, particularly as the Treasurer has advised there will be no income tax cuts or other benefits to the Australian public as the result of changes to the tax system.

“Trusts are a legitimate and long-standing structure used by small businesses, farmers, tradies, professionals and investors for asset protection, succession planning and commercial risk management,” she said. 

Ms Wong said media reports suggested the policy could be implemented via a non-refundable withholding regime applying a minimum 30 per cent rate to trust distributions. This would materially alter after-tax outcomes and risks landing hardest on middle income Australians and smaller business operators.

“An effective personal income tax rate of 30 per cent typically applies to taxable income nearing $200,000, yet millions of middle income Australians receive trust distributions as part of normal business and investment activity,” Ms Wong said.

“Low- and middle income recipients would end up paying more tax than if they earned that income directly, while most companies are taxed at 25 per cent and refundable franking credits apply to dividend earnings.

“To impose a blanket rate that sits at the higher end of tax rates in Australia isn’t about restoring equity – it risks introducing a punitive regime.”

“Trusts are not easily unwound and have a multitude of non tax purposes for their establishment. They are sitting ducks for the government to raise revenue, and the sudden imposition of a high tax rate on assets trapped in these structures is an unreasonable proposition.”

CPA Australia warned that introducing major new trust tax settings before addressing existing complexity would compound compliance burdens for businesses and advisers – particularly around family trust election rules.

“Small businesses and their advisers are already grappling with the growing complexity of trust taxation rules, particularly the family trust election rules. Fixing known issues in the current family trust rules should be the priority. Including allowing genuine mistakes to be corrected and ensuring outcomes are proportionate,” Ms Wong said.

Ms Wong noted that a similar minimum tax concept was debated previously and ultimately not progressed, reflecting the sensitivity and complexity of trust reform.

“This is not a new policy concept. A similar proposal to apply a minimum tax rate to trust distributions was taken to the 2019 Federal Election but was ultimately not pursued,” she said.

“That history reflects the complexity and sensitivity of trust taxation reform. Trusts are not exclusively used by high wealth individuals – they are embedded across Australia’s small business and family enterprise landscape.

“Changes like this cannot be dumped on an unsuspecting public with no details, no consultation, no modelling and no transparency. It didn’t work in 2019 and it doesn’t work now.”

Ms Wong said if the government proceeds, it must publish full design details and undertake genuine consultation, including modelling of impacts on small and medium sized businesses and the broader economy.

“Tax reform should not be driven solely by revenue objectives,” she said.

“To properly inform the policy debate, the government should look beyond the additional revenue this measure might raise and model its impact on small and medium sized businesses, as well as the broader economic effects.

“Good tax design starts with clear policy principles, simplicity and fairness – not a revenue target.”

“A minimum tax on trust distributions may sound simple in theory, but trust taxation is highly complex in practice. Without careful design, broad reforms can create unintended outcomes including double taxation, increased compliance costs and uncertainty for small business and family enterprises.

CPA Australia said technical design would be crucial, with CPA members already identifying major issues that could push effective tax outcomes above 30 per cent – particularly where trust income includes franked dividends or flows through corporate beneficiaries.

“Our members are the accountants, advisers and tax practitioners who will ultimately help businesses and individuals navigate these rules. They have already identified significant technical issues that would need to be addressed before any proposal could be workable,” Ms Wong said.

“Without careful interaction with Australia’s dividend imputation system, there is a real risk taxpayers could face tax outcomes well above the stated 30 per cent minimum rate. 

“At this stage, there is no confirmed policy detail, which makes consultation critical,” she said. 

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Adrienne Biscontin
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