Small business trusts get stamp duty escape hatch in Chalmers’ latest tax tweak

Small business operators will avoid state government stamp duties if they re-arrange their tax affairs after the Treasurer Jim Chalmers revealed an overhaul of his budget reforms to family trusts.

In the face of warnings that the reforms could leave small businesses paying a big hike in their taxes or owing tens of thousands of dollars in stamp duties, Chalmers on Thursday unveiled tweaks to the government’s planned budget measures.

This is the third round of changes to the budget tax reforms, following political pressure on Labor to ensure widows or divorced partners were not left with large capital gains tax bills or denied negative gearing incentives.

The budget contained changes to negative gearing, capital gains tax, elements of the company tax system, research and development concessions as well as a cut to the lowest personal income tax rate.

It also introduced a minimum 30 per cent tax on discretionary trusts in a bid to align the tax rate on income earned by ordinary workers and those who can use trusts to reduce their annual tax hit. Income funnelled out of trusts often goes to people who declare a taxable income just below changes in tax thresholds in a process called bunching.

The number of trusts has, according to Treasury, more than doubled over the past two decades while the number of companies has lifted by just 70 per cent.

Under the planned changes, family trusts will be exempt from the minimum 30 per cent tax if they decide to make a fixed distribution out of the trusts to nominated beneficiaries. Doing that will mean the trust will not have to restructure, avoiding any state stamp duties.

All distributions from trusts to registered charities and deductible gift recipients will be exempt from the minimum tax. About 5 per cent of all donations to charities in 2024 came through trusts.

Distributions to other tax-exempt entities such as sporting clubs, up to a yet-to-be defined “reasonable cap”, will also be exempt.

The government has also excluded a range of trusts from the minimum tax requirement, including charitable trusts, special disability trusts, deceased estates and discretionary testamentary trusts, those used by primary producers and superannuation funds.

Chalmers said the reforms struck the right balance for the overall tax system.

“This is an important part of our ambitious tax reform package, which is making the tax system fairer and more sustainable, making it easier to buy a first home and cutting income taxes for workers,” he said.

When announced, the government revealed the minimum tax on trusts was forecast to raise $4.5 billion in its first full year of operation in 2029-30. Over the next decade, it was expected to earn $40 billion in revenue. This masthead understands the changes are unlikely to reduce that expected lift in revenue.

Treasury estimates there are 350,000 active small businesses, or 15 per cent of all small firms, operated through a discretionary trust in 2022-23. Of those, 40 per cent or 140,000, are not expected to pay additional tax or need to restructure.

Family trusts are often used in small businesses and partnerships to simplify tax arrangements and to ensure proper succession planning.

But the Australian Chamber of Commerce and Industry said the government’s plan would mean “significantly higher” taxes on small businesses at the worst possible time.

“The government can’t harvest that huge amount of money without leaving small businesses poorer and less competitive,” chamber chief executive Andrew McKellar said.

“The government is yet to answer the question: why penalise small businesses?”

But the Australian Industry Group said the changes were a major improvement on what was announced on budget night.

“The government’s new proposal avoids the threat of state-imposed stamp duties on businesses genuinely complying with federal tax law,” group chief executive Innes Willox said.

“This decision is of particular importance to family-sized businesses that operate under a legitimate trust arrangement.”

Consultation on the proposed changes is open until September 18.

Tax and financial services leader for Chartered Accountants ANZ, Susan Franks, said the short consultation period would be challenging for reforms that were so complex.

“The changes appear to address some of the practical concerns about the cost of restructuring raised by small businesses, family enterprises and other stakeholders during consultation,” she said.

“However, the consultation period is far too short for reforms of this complexity, and important concerns remain, including uncertainty about how the election will operate alongside trust law and existing tax provisions.”

“Interactions between the family trust election provisions and this new election will be particularly challenging to navigate.”

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