The federal government has proposed a workaround designed to prevent small businesses from being hit with costly state stamp duties when restructuring to avoid Labor’s new 30 per cent minimum tax on discretionary trusts. Under the plan, businesses would be able to keep their existing trust structure while locking in fixed distributions, allowing them to remain exempt from the new tax without triggering a formal restructure.
The Albanese government is moving to address one of the most controversial side effects of its proposed new tax on discretionary trusts.
Treasurer Jim Chalmers has released draft legislation that includes a mechanism aimed particularly at small businesses concerned they could face two separate costs: the new federal tax itself and state-based stamp duty if they restructure their business affairs to avoid it.
The draft legislation is now open for consultation.
Why stamp duty became a problem
Many Australian small businesses operate through discretionary trusts, which allow trustees flexibility in deciding how income is distributed among beneficiaries.
The government argues these structures can be used to minimise tax and has proposed a 30 per cent minimum taxapplying specifically to discretionary trusts.
One possible way to avoid the new tax would be to restructure into a company or a fixed trust, where income is distributed in predetermined proportions.
The problem is that changing the legal structure can involve transferring assets.
That can trigger state or territory stamp duty.
Small business groups warned the government that some operators could be left facing what they described as an impossible choice: accept a higher tax burden or pay significant costs to restructure.
Chalmers proposes a workaround
The government’s solution is designed to avoid triggering a stamp duty event altogether.
Instead of formally converting a discretionary trust into a fixed trust, trustees would be allowed to keep the existing trust but elect to make fixed distributions to their current beneficiaries.
As long as those fixed arrangements remain in place, the trust would be exempt from the new minimum tax.
In practical terms, the trust would remain discretionary in legal form but would stop using that discretion.
This would allow small businesses to change the way income is distributed without necessarily transferring assets or changing the underlying structure.
Charitable donations also exempted
The draft legislation contains another significant change.
Donations made from discretionary trusts to registered charities, deductible gift recipients and other income-tax exempt organisations, including religious groups and sporting clubs, would be excluded from the new tax.
Some trustees had warned that charitable giving could be discouraged if such payments were caught by the new regime.
Tax starts in 2028
The discretionary trust tax is scheduled to begin in mid-2028, a year later than the government’s planned changes to capital gains tax and negative gearing.
A number of exemptions are already proposed, including for superannuation funds, disability trusts, deceased estates, testamentary trusts, charitable trusts and some farm income arrangements.
Business groups have also called for assistance with the legal and financial advisory costs involved in adapting to the new rules.
Consultation closes September 18
The draft legislation will remain open for consultation for two weeks, with submissions closing on September 18.
The government’s challenge is to preserve the policy objective of the new tax while avoiding unintended costs for small businesses.
For many businesses, the issue is not only how much tax they will pay.
It is also how much it costs to reorganise their affairs every time the rules change.
