%20(1).jpg)
Authored by Andrew Ellem, Partner - Accounting & Business Advisory
Last Sunday my frustration with the pending changes in "How Trusts are Taxed" boiled over.
David Mulino was interviewed by David Speers on Insiders, this interview epitomised how the current Government is building the plane while it is flying and displayed a lack of understanding of why business owners, families that make investments and both business owners and families structure their succession planning needs and legitimately utilise discretionary trusts.
Some Simple Facts:
- Yes, taxpayers can utilise trusts to minimise tax, that doesn’t mean taxpayers can’t utilise companies to do the same minimisation strategies.
- Companies pay a flat 25% tax rate for operating business profits
- Trusts distribute profits to beneficiaries, and these distributions could go to taxpayers that pay less than 25%, as can company dividends
- If we include business that employ between 1 and 199 persons the percentage of those employed by business that are likely to be affected by these changes is approximately 65% of those employed (Sourced from an Australian Government report July 2025 Contributions of Australian Employment prepared for Australian Small Business and Family Enterprise Ombudsman)
What does it mean to be a business owner?
- It means putting any asset that they own at risk for day to day operations of the business
- Financing the working capital of the business and to start a business this generally will mean utilising their family home as security for this financing
- Working long hours and sometimes not being commercially remunerated for this at award or market wage and salary rates
What were the Government's main objectives in the trust tax changes?
- Making sure that business owners are taxed more evening / similarly to those employed for their labour (as stated by Daniel Mulino in the Insiders interview)
- Stopping tax avoidance, the Government and Australian Taxation Office already has legislation for this.
- The 3 drivers of this legislation released in the budget narrative,
- Intergenerational equity
- Productivity
- Sustainability of the tax system
Do all wage and salary earners take as much risk as business owners?
- NO
Do wage and salary employees use their home to fund their employment relationship?
- NO
The process of this legislation has been very poorly constructed that it now has had numerous carve outs and amendments. The carve outs are:
- Testamentary Trust – (Removing the Widows Tax)
- Social enterprise and NFP funds
- Educational Trusts
- Allowing discretionary trust, the ability to restructure
- Convert to a company
- Set fixed beneficiaries
- This carve out to fix beneficiaries does not facilitate a death of the beneficiary, changes to the ownership in a company, or a family having children after the trust being formed (they cannot be included in the future)
- The Federal Government has not considered the State legislators, therefore any restructure will incur:
- Stamp duty in some states for transfer of business assets
- Stamp Duty on Property in most states
- Stamp Duty on trust resettlements if the State Legislator deems the restructure a resettlement, including fixing beneficiaries
- The government assume that all the 840,000 discretionary trusts are utilised in avoiding tax. If this was true, there is already legislation to disincentivise these behaviour.
- The Government according to Daniel Mulino have budgeted for all the restructures of the 840,000 trusts to cost overall $50M, this is a little under $60 per trust.
- The Government wants to have business owners and investors that utilise trust to be taxed as if all these earnings are taxed similar to wage and salary earners are taxed for their labour.
- This makes no sense, business owners invest in a business asset and employ resources that help them generate profits, this is different to being an employee
- Investors generate returns from investing profits and capital, why should investors be taxed similar to those utilising only labour skills?
- Under the proposed legislative changes if a trust distributes to a company the company’s after tax profit is 49%, that means the effective tax rate is 51%.
Paul Keating introduced the imputation system for companies to guarantee that business profits and investment earning distributed via dividends were not double taxed. (APH.GOV.AU The Inquiry into the implication of removing refundable franking Credits requested 19 September 2018)
Why is this bad legislation for business owners and family investors?
- Business owners need to have a vehicle that can facilitate succession of the business without creating taxing events such as the sale of the business when the parents step aside and allow their children to take over the business
- Business owners need to be able to protect their assets.
- Business owners should not own assets in their own names because this is a risk
- Investors need vehicles that allow families investments to be fluid in intergenerational transfers, aside from wills
- Business owners should be rewarded for:
- The risk and stress they take on
- For employing up to 65% of those employed in Australia are employed through business structures and most likely these structures involve trusts
The Answer:
- Keep the 30% tax of trusts if this is the Governments legacy
- Allow the 30% tax to be creditable for companies that may receive distributions
- Allow the Trust Tax to be refundable to those that are employed in the business.
- Allow families that have Investments to generate profits and distribute these to family members
- The Government have the current levers within the current Commonwealth Income Tax Assessment Acts 1936 and 1997, Fringe Benefits Assessment Act 1986
- Division 7A of the ITAA 1997 - companies lending to shareholders or associates
- Division 84 of the ITAA 1997 - Personal Services Income regime
- Division 6AA of the ITAA 1936 - Taxing of minors
Things could be kept simple and continue to support business owners and investors alike, it's about acknowledging that business owners are not just providing their labour skills they are providing enterprise knowledge, financing and taking risks in generating profits within the business, Investors definitely are not using their labour skills in making investments, usually they would engage an adviser to undertake this, so in the end this legislation should be supportive of business owners, because they are the source of improved productivity.
This article is for general information and discussion purposes only and reflects the author's views on proposed tax reforms as at the date of publication. It does not constitute tax, legal or financial advice. Readers should seek independent professional advice regarding their individual circumstances or contact Prime.
