Trust tax 'sledgehammer' targets more than just integrity issues, IPA says

The changes proposed in Treasury’s consultation paper, Minimum tax on discretionary trusts, will upturn many commercial arrangements if businesses are forced to restructure, one tax expert says.

Tony Greco, senior tax adviser at the Institute of Public Accountants, said: “The discussion paper almost pre-empts an outcome”.

“It sends a strong message [of] ‘we want businesses to exit the discretionary trust structures’, and [as a result] the use of corporate beneficiaries becomes uncommercial.”

“By not allowing a refundable credit for a corporate beneficiary … it doesn't become commercial, so that's why it indicates that they made up their mind.”

“There also appears to be an overly simplistic assumption that affected taxpayers can readily restructure into alternative entities. In practice, restructuring can be costly, complex and commercially disruptive, particularly for small businesses.”

Greco called it a “sledgehammer approach”.

“It just cuts out bucket companies, not recognising that they're an essential part of the financing for an active business.”

“You're talking about employment contracts, supplier contracts, the legal entity being changed, ABN, the legal costs.”

“All those sorts of things, not something you do [sic] lightly, and so all those implications don't seem to be mentioned in the paper. It just says, ‘well, you can just restructure’.”

Restructuring is a costly and time-consuming exercise, Greco said.

“Nowhere is it acknowledged the state taxes that apply to real property. Not all states provide relief when there is restructuring.”

The government, he said, has used the business case of integrity concerns to pre-empt the outcome.

“They've identified some integrity concerns, namely income splitting, the use of companies or bucket companies, and the deferral opportunities that are available when you do use a bucket company, limiting the tax rate to 30 per cent, and then controlling the timing and exit.”

“They've basically pre-empted the outcome by saying, ‘we’ll allow discretionary trusts to structure out’ … they're not indicating other options, so that's what I refer to as pre-empting the outcome.”

Greco said that on top of this, the 18 business days provided for the consultation are not sufficient for these changes.

“We seem to be rushing the process again; 18 business days, I don't think is sufficient time for people to consider all these other options for addressing the business case that they've put forward for the changes,” he said.

“If we go into a genuine consultation, I think everything should be on the table. There are measures that can be taken to limit those integrity concerns, but there's nothing in the paper that suggests that that's what they want to do.”

Greco said some workable alternatives could include addressing the integrity concerns without unwinding these commercial arrangements and corporatising a trust structure.

“That will require quite a bit of lengthy discussions, if [Treasury is] amicable to those sort of outcomes”.

“We remain hopeful that, through consultation, alternative solutions will be considered that address the policy concerns without creating unfair or unintended consequences.