The Council of Small Business Organisations Australia's (COSBOA) submission to the Federal Government's consultation on the proposed 30 per cent minimum tax on discretionary trusts argues the measure is "unfair in its bluntness" and will cost small business billions.
According to Treasury, approximately 350,000 Australian small businesses operate through discretionary trusts, with around 210,000 expected to face a higher tax burden if the proposal proceeds.
COSBOA estimates that if those businesses are forced to restructure, the collective cost could run into the billions of dollars, based on restructuring costs of between $15,000 and $50,000 per business, or approximately $3 billion to $10 billion across the estimated affected businesses.
COSBOA Chief Executive Officer Skye Cappuccio said the proposal risked penalising small businesses that had legitimately chosen discretionary trusts to structure and protect their businesses.
"This proposal is grossly unfair. It imposes a financial penalty on arrangements that have been legal for decades and are commonly used by small businesses for legitimate commercial purposes, including asset protection, succession planning and business continuity."
She said the proposal also failed to reflect the realities of many small family-run businesses.
"The consultation paper suggests the measure would better align the tax paid on trust income with the tax paid by employees," Ms Cappuccio said.
"However, many family members working in small businesses and paid predominantly through trust distributions do not, and may never, earn the more than $200,000 annual salary that aligns with an effective income tax rate of 30 per cent.
"Small businesses support a fair and robust tax system, but integrity measures should be targeted and proportionate. They should focus on the behaviour of concern, not impose additional costs on family businesses using longstanding and lawful business structures."
COSBOA has also called on Treasury to release the modelling and evidence underpinning the proposal, including:
- any residual integrity gap after existing tax rules are applied;
- the proportion of trusts engaged in the targeted behaviour; and
- the compliance, restructuring and business-continuity costs the measure would impose.
Ms Cappuccio said that if further change is required, it should target the problem identified not business structures, by strengthening existing integrity measures rather than introducing a blanket minimum tax on discretionary trusts.
If the proposed minimum tax is implemented, COSBOA urges the Government to commit to grandfathering small businesses operating through discretionary trusts with aggregated turnover below $10 million, recognising they are least able to absorb the costs of restructuring.
At a minimum, COSBOA says an annual distribution-pattern test should be considered as a lower-cost alternative that addresses integrity concerns without forcing widespread restructuring or changes to legal business structures.
Ms Cappuccio said there was a better way to protect the integrity of the tax system without undermining small business.
"We support maintaining the integrity of Australia's tax system, but there are better ways to achieve that than imposing a blanket tax on legal business structures that will threaten the viability of valued small businesses.
