Small family businesses could face crippling tax bills if they change how income is distributed among family members under Labor’s proposed trust tax reforms, a small business representative has warned.
CEO Skye Cappuccio of the Council of Small Business Organisations Australia (COSBOA) said the government’s new rules that come with its impending 30 percent tax on trust income was “too harsh for most businesses to consider.”
The Labor government plans to impose the minimum tax rate on discretionary trust income from July 1, 2028, arguing the measure will close tax loopholes and promote greater fairness in the tax system.
A family trust is a type of discretionary trust in which a trustee decides each year which family members receive the income, which can legitimately lower the tax burden.
Trusts can opt out of the minimum tax by locking in fixed income and capital shares for nominated beneficiaries.
However, changing those arrangements outside limited exceptions would trigger a 47 percent tax (the top marginal rate of 45 percent plus the 2 percent Medicare levy) on the trust’s entire net income for that year.
The council’s submission (pdf) gives the example of a business paying $250,000 a year (US$173,000), shared between two parents who both work in it full time.
If they elected to pay themselves a fixed share, they would pay about $62,000 in tax, the same as today. But if an adult child comes home to work full time so one parent can go part time, the tax for that year would jump to about $117,500.
“For three adult family members that rely on trust distributions for living costs, that is a bill that can threaten the business,” the submission said.
Cappuccio told the Senate Economics Legilsation Committee on Nov. 5 that small family businesses “are not often a steady ship,” and that families need to change how they share income as children join or a partner steps back.
Matthew Addison, former executive director of the Institute of Certified Bookkeepers and a COSBOA board member, said such a bill could be the end of a business that would otherwise have kept going.
“Think of the $100,000 tax bill that has to go out the door that will close the business,” he said.
Under the proposed legislation, the fixed shares can only be changed when a family member dies or a relationship breaks down, not when a child is born or a family member loses mental capacity.
The government’s explanatory notes said the top rate was meant to discourage trustees from making an election they did not intend to keep, or from using it to avoid tax. They also mentioned that a company or fixed trust would face other tax costs if its ownership shares changed.
Unfair to Low Income Earners
Cappuccio said that with the Medicare levy, Labor’s trust tax comes to 32 percent on the very first dollar of income that enters the trust, whereas compared to the personal tax rate, someone has to earn “very close to $230,000” to pay that same rate.
“This particular approach is, in my opinion, baking in inequity,” she said.
In response, Committee chair, Labor Senator Lisa Darmanin, said 85 percent of small businesses do not use a trust, and also that families could take up the exemption and fix the incomes diverted to the beneficiaries.
Cappuccio agreed, but noted that such an arrangement would only work if the family’s circumstances remained unchanged.
“The status quo for a small family business is not usually that things don’t change. It’s usually that things evolve and change over time,” she said.
COSBOA wants the tax scrapped or businesses with turnovers under $10 million to be exempt entirely.
Asked by Liberal Senator Jane Hume whether a one-year delay would help, Cappuccio said it would give businesses time to prepare, but was “just pushing the can down the road.”
“This is a bad tax bill, whether it comes in on the first of July, 2028, or the first of July, 2029,” she said.
