Make the most of time the government offers
Until July 2028 the government is allowing small business owners to transition to a different ownership structure without incurring capital gains or other taxes. Procrastination in considering and acting on this offer could be costly.
According to Budget papers, 60% or 210,000 of 350,000 small businesses that operate through a discretionary trust structure, are about to be disadvantaged financially unless they decide to restructure their businesses.
Discretionary trusts have been part of the basic structure of Australian family business and family investment for half a century, and the government’s decision to impose a minimum 30% tax on the annual $142b of income distribution from the nation’s 840,000 trusts, recalibrates the economics of them all.
RSM Australia tax technical partner Liam Telford tells us the Budget proposals “represent the most consequential change to family wealth and small business structures since the 1997 Division 7 crackdown on tax-free distributions paid by private companies”.
Proposals and consequences
The government proposes the minimum 30% tax rate on discretionary trust distributions (with some exceptions) to close what Jim Chalmers has persuaded Anthony Albanese is a long-existing and inequitable loophole allowing prosperous business owners to split and allocate income to family members in lower tax brackets. But reality makes mock of this argument.
What in effect Albanese and Chalmers have done, is, quite apart from non-Labor voters, force thousands of Labor-voting business owners from all walks of life who are nowhere near being wealthy capitalists, to decide before July 2028 whether to accept the Budget’s proposals on discretionary trusts and capital gains tax, or, at considerable cost, pay to restructure their business, perhaps as a company.
Macks Advisory can’t help but wonder whether the government has yet calculated what its untrustworthiness (no pun intended) will cost them, not only among traditional Labor voters but all voters across the political spectrum.
For it’s clear this latest budget includes a catalogue of things the PM promised to be “off the table” and has thus reduced the government’s credibility to zero. It’s assured that voters, previously Labor supporters will, in disgust, switch political allegiance.
Quite apart from the changes to discretionary trusts, latest modelling indicates the budget’s negative gearing and capital gains changes will push rents up by as much as another $477 by the end of the decade while also exacerbating the nation’s housing crisis.
According to independent consulting firm Qaive and Tulipwood, the tax changes will wipe out 3,800 construction jobs by 2029-30.
There’s no doubt Mr Albanese has become aware the budget will cost him political capital he may not be able to afford. He’s been challenged in parliament to call an election on the budget, and as this article is being written, we understand he’s in the process of humiliating his Treasurer by considering modifications that alter several of the budget’s proposals.
This is in the context of finance experts’ warnings the budget’s deadline for a small business’ reconstruction fails to appreciate the complexity of changes an owner may need to make concurrent with changes the government wants to make to negative gearing and capital gains tax.
Because discretionary trusts have for so long been the cornerstone of small business structures aimed to protect assets, intergenerational wealth and succession plans, Macks Advisory is also concerned the government may not be allowing enough time for long-standing trusts to be unwound and new structures built that won’t be disadvantaged by the proposed 30% minimum tax.
Of all business enterprises in Australia, 97% are small businesses employing five million people -- which makes it difficult for us to understand why a government would want to disadvantage small business owners financially, and thus the national economy.
There’s a political doctrine proclaiming everyone should have an equal slice of the cake, but unless more cake is made for sharing, then, as the population grows, the slices of cake will become smaller and we’ll all grow poorer.
And the cake won’t grow bigger if too many business owners decide the government’s changes to the function of discretionary trusts don’t make it worthwhile running a business. People from all walks of life and all political persuasions use business profits to ensure their families’ financial security -- which automatically contributes to national prosperity.
It’s hard enough as it is to manage the cost of living and maintain a profitable business without being disincentivised by this latest non-aspirational, inflationary government policy.
Treasury’s argument
Treasury officials say there are “drawbacks” in structuring discretionary trusts into small businesses, including difficulties in accessing debt financing or attracting equity finance, and they argue businesses can reduce the impact of the proposed 30% minimum tax by employing trust beneficiaries in a business rather than paying them a trust distribution.
Payments of salaries or wages to employees will not attract the minimum tax.
It’s further claimed owners can lessen their tax obligations by restructuring their businesses, for example, into a company or a fixed trust.
Treasury modelling has demonstrated that a minimum 30% tax on a business’s income distributed to discretionary trust members equates roughly to the tax imposition on wage and salary earners who are not members of discretionary trusts, arguing this is justification for change.
But where is fairness in a policy that forces business owners to consider restructuring or selling their businesses because of a tax regime that erodes profitability to the extent that investment and hard work seem no longer worthwhile?
To make things worse, anyone who has hoped to sell a business to fund retirement faces having to pay capital gains tax.
It’ll be interesting to see what the Council of Small Business Organisations Australia manages to achieve in its negotiations with the government.
Given the obvious concern re both the significance as probable fluidity of the issues at the time of writing this newsletter is being written our understanding is if the capital gains & negative gearing gets passed as it is this will start from the 1 July 2027.
The trust 30% doesn’t start until 1 July 2028 and there will be a three year period 1 July 2027 to 30 June 3030 to restructure.
Community
It is not instructive to note online commenting which further responds the dialogue or sense of frustration for example ie The Karl Stefanovic Show “we have to pay for it”. Switzer Report “Geoff Wilson AO “the Budget will change the shape of Australian investing”.
Conclusion
Initially Mr Albanese and Dr Chalmers obviously believed they had the political capital to get away with what they’re trying to get away with, but at least the former now seems to doubt this -- as does Macks Advisory. We remain firmly of the belief that such substantial changes should be taken to the electorate to do otherwise very well lead to the proposal changes in some form (even if enduring past election), will still substantially influence in many ways current and coming generations. There is strong historic political support for this comment.
Because so many people for so many reasons are obviously convinced the budget is a stinker, it seems likely the government will suffer considerably at the next election unless the PM does well with the rethink he seems to be having.
We certainly think a rethink is a good idea, particularly if it benefits the economy and therefore all of us.
