A Senate inquiry into proposed changes to trust tax laws has been told that the reforms could have significant consequences for small businesses, despite the relatively straightforward nature of the questions posed during the hearing. Experts from the small business and accounting sectors have expressed concerns about the potential costs and compliance burdens associated with the changes, and have urged caution in implementing the reforms.
Impact on staff payments
The Senate economics committee recently held a two-day hearing to examine the government’s plan to introduce a minimum 30% tax on discretionary trusts, which are commonly used by small businesses. During the hearing, Greens Senator Nick McKim asked witnesses to explain how the reforms would affect the way small businesses pay their staff.
Matthew Addison, until recently the chair of the Council of Small Business Organisations Australia (COSBOA), said payments to staff directly employed by a businessâwho are not beneficiaries of the discretionary trustâwould remain the same. Skye Cappuccio, CEO of COSBOA, added that small businesses using discretionary trusts are likely to have few actual employed staff. Instead, family members working within the business are compensated with distributions, not wages.
Cappuccio responded, “So [the reforms] will change the way that a small business pays staff, if those staff are family membersâis that what your evidence is?” She clarified, “Obviously, there are a lot of different ways of doing this⌠often [family members] will be receiving the distribution as the way of remunerating them for the efforts they put into running the business.”
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Senator McKim also questioned whether more business owners would opt to take their earnings as salaries instead of distributions under the reforms. Addison replied that this is unlikely, as steady wage structures can be difficult for small businesses with highly variable revenue.
Transition costs and flexibility
The government’s plan includes an ‘election’ carveout, allowing discretionary trusts to avoid the new 30% tax if they fix their distributions, though this would reduce flexibility. Senator McKim inquired about the transition costs and whether beneficiaries could take income as salaries under this option.
When asked if a small business could simply elect to change from a discretionary trust to a fixed trust, thereby incurring minimal restructuring costs, Senator McKim was told, “To clarify, changing from a discretionary trust to a fixed trust is the same as a restructure from a discretionary trust to a company in terms of advisory costs and in terms of the paperwork requirements, which are quite substantial. It’s considered the same entity change; you’re just changing into a fixed trust as the entity.”
Employee versus beneficiary debate
The federal government argues that discretionary trusts provide tax benefits not available to ordinary wage earners, and the new 30% tax aims to level the playing field. However, business advocates and accounting leaders oppose the reforms, citing limited flexibility and significant compliance costs.
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Liberal Senator Jane Hume asked Susan Franks, leader of tax, superannuation, and financial advice for Chartered Accountants Australia and New Zealand, why small business owners might avoid becoming formal employees. Franks explained, “When our members have been considering that option, theyâve highlighted that itâs not just the salary and wages; itâs also the super, the workers comp and other insurance that need to be taken into account. Whether being an employee is an indication that your business is viable and being successful is a different question.”
Hume also questioned government-led analysis that found the cost of restructuring would sit at $91.54 per hour, a figure accounting leaders say dramatically undercuts actual market rates for professional advice. She commented, “I was blown away by the idea that the governmentâs modelling for professional restructuring advice would cost around $91 an hour⌠I canât get a plumber for $91 an hour.”
Timing and opposition
The reforms are set to take effect on July 1, 2028, with trusts having one year to decide on the âelectionâ carveout. Industry figures argue this timeframe is too short and have called for delays. Jenny Wong, tax lead at CPA Australia, stated, âItâs really important to get certainty around these rules because theyâre really complex.â Cappuccio added, âA delay is somewhat useful in that it gives small businesses and their advisors time to prepare, and, hopefully, weâd get some clarity on those instruments that havenât been clarified, but it is just pushing the can of bad tax down the road.
This is a bad tax bill, whether it comes in on 1 July 2028 or 1 July 2029.â Addison remarked, âA one-year delay without substantial change to the whole concept and philosophy behind this legislation is, again, a waste of time.â The committee will table its report on November 13.
