The Council of Small Business Organisations Australia (COSBOA) is warning proposed trust tax changes could saddle hundreds of thousands of small businesses with significant restructuring costs, additional red tape and uncertainty, while also increasing their tax bills.
While much of the public debate has focused on tax outcomes, COSBOA says far less attention has been given to the practical consequences facing the estimated 350,000 small businesses operating through trust structures.
COSBOA CEO Skye Cappuccio said many business owners were only beginning to understand the complexity, cost and disruption that could be involved if restructuring became necessary.
"Many small businesses are only now realising these proposals could leave them facing a difficult choice: pay significantly more tax each year or undertake an expensive and complex business restructure," Ms Cappuccio said.
"For genuine small businesses, this is no longer simply a tax discussion. It is also about advisory costs, red tape, productivity and confidence. Every hour spent navigating additional compliance is time that cannot be spent serving customers, employing people or growing a business."
COSBOA said concern was also growing among Australia's restructuring and turnaround professionals, who warn the proposed changes could trigger a significant increase in business restructures across the small business sector.
Eddie Griffith, Chair of the Affiliation for Business Resilience & Turnaround (ABRT), said the proposal risked placing additional pressure on both small businesses and the advisers supporting them.
"The proposed changes to discretionary trust taxation are likely to trigger a surge in business restructures, placing significant pressure on an already stretched small business advisory sector.
"Restructuring costs are highly variable and difficult to predict. Based on experience, they can range from $15,000 to $50,000 depending on business size, complexity and industry. This creates a significant and unquantifiable risk for many small businesses."
Depending on the circumstances, restructuring can involve changing the legal structure of a business, obtaining accounting and legal advice, refinancing existing loans, securing lender approvals, novating contracts, updating employment arrangements, revising insurance policies and addressing potential stamp duty implications.
Ms Cappuccio said the businesses affected were not large corporations or passive investment vehicles, but genuine small businesses using trust structures for legitimate commercial reasons.
"Around 350,000 small businesses operate through trusts, and most have annual turnover below $2 million a year," Ms Cappuccio said.
"These businesses include trades, retailers, hospitality venues, professional services firms and family-run enterprises that have spent years investing in their businesses, employing people and contributing to their local communities.
"Many are already dealing with rising costs and economic uncertainty. Additional compliance burdens and restructuring costs would place further pressure on businesses that are simply trying to grow, invest and plan for the future."
Through its Fair Go for Small Business campaign, COSBOA continues to hear from small businesses concerned about the practical impact of the proposed tax changes.
One example involves a husband-and-wife team focused on growing their business.
The couple currently receive trust distributions totalling around $113,000 between them. They don't receive any other income. Under the proposed changes, their combined annual tax bill would increase from approximately $16,895 to around $36,160 - an additional $19,265 every year, more than doubling their current tax liability.
They say the additional tax would significantly reduce funds available to reinvest in growing the business while placing greater pressure on household finances.
Ms Cappuccio said the broader economic consequences should also be considered.
"If Australia wants stronger productivity, greater business investment and more jobs, we need to carefully consider whether forcing small businesses to choose between an additional tax burden or a costly restructure helping or hindering those objectives."
Ms Cappuccio urged policymakers to fully consider the practical consequences for small businesses before proceeding.
"Small business owners are simply asking for a fair go," she said.
"If there are specific integrity concerns within the trust system, Government should address those concerns directly, rather than creating significant costs, complexity and uncertainty for hundreds of thousands of genuine small businesses that are already doing the right thing."
COSBOA is calling on Government to:
- Consult further with the small business sector before legislation is introduced.
- Ensure any reforms do not create unnecessary compliance burdens or force costly restructures.
- Target any integrity concerns directly, rather than applying a blunt measure to genuine small businesses.
COSBOA acknowledges the Government has indicated further consultation on trust taxation will occur in the coming weeks and looks forward to engaging constructively in that process.
The experiences of hundreds of thousands of small businesses operating through discretionary trusts should not be dismissed. COSBOA has provided detailed policy analysis, modelling and real-life case studies demonstrating the likely impact of the proposed changes and will continue to work with Government to ensure these concerns are properly considered before legislation is introduced.
