Labor’s $45bn trust tax hike risks state war over stamp duty, expert warns

Labor’s legislation establishing a contentious $45bn tax hike on trusts risks sparking a war with the states as thousands of families and businesses will face stamp duty even under new measures designed to avoid it, one of Australia’s leading tax experts claims.

Following backdowns on the original designs of some of the biggest tax changes in 40 years, the government has watered down new rules on trusts following concerns higher taxes would induce thousands of people to roll over assets into companies that paid less tax, triggering the transfer of assets and forcing billions of dollars in stamp duty payable to the states.

Draft legislation released by Jim Chalmers on Thursday introduced a new option where discretionary trusts could elect a fixed-distribution regime that, while restricting flexibility for business, would enable the trust to avoid Labor’s minimum 30 per cent tax on distributions and capital gains, reducing the incentive to roll over assets into a company.

On Thursday, Dr Chalmers, who also announced that trust ­donations to charities would be exempt from the tax, said the new fixed regime option for trusts would avoid the need to pay stamp duty. “The election would not ­require a restructure and is not ­expected to result in state and ­territory stamp duties,” the Treasurer said.

Dr Chalmers is seeking to minimise wider tax repercussions beyond Labor’s own changes.

However electing a fixed-­distribution regime was still enough to trigger stamp duty in NSW and Victoria, one leading tax expert warned. Hamilton Locke tax partner Matthew Cridland said the difficulty for Treasury was that the public guidance issued by revenue offices in NSW and Victoria indicated that a change from discretionary interests to fixed interests might involve “a change in beneficial ownership”.

“While the public guidance does generally contemplate a formal trust deed amendment, the duties legislation itself is directed to changes in equitable interests and does not necessarily require an amendment of the trust deed,” Mr Cridland said.

He said it was difficult to reconcile the Treasurer’s statement that electing to switch to a fixed-distribution regime was “not expected to result in state and territory stamp duties” with the published positions of Revenue NSW, and the state revenue offices of Victoria and Tasmania.

“At a minimum, taxpayers would require clear public guidance from those revenue authorities before it could safely be assumed that an election is free of duty consequences in those states,” Mr Cridland said.

The Albanese government has been so concerned about the ­impact of changes to trusts and the stamp duty those trusts would have to pay that last month it moved to publicly support a trust in a case before the High Court where the trust was disputing a claim by the NSW government for a $1.5m stamp duty payment.

Attorney-General Michelle Rowland’s office confirmed it had joined that High Court case and made a submission.

Neither the NSW not Victorian government responded to questions on how they viewed Labor’s new trust option in relation to stamp duty liability.

The Treasurer’s office has told people it sought legal advice and was confident people would not be forced to pay stamp duty if they took up the fixed-­distribution regime.

The Council of Small Business Organisations Australia (COSBOA) said the Albanese government’s new rules were a “better outcome for many affected small businesses than the original budget proposal”, but the new option restricted businesses flexibility.

“We appreciate that the government has listened to small businesses and that Treasury has responded with a practical option that should reduce the impact for many of those affected,” COSBOA CEO Skye Cappuccio said.

“But there is still a trade-off. Businesses choosing this pathway may retain their existing ­structure and tax treatment, but they will give up some of the ­flexibility over distributions that is an important feature of discretionary trusts.

“That flexibility is particularly important to succession planning in family trusts.”

The Australian Chamber of Commerce and Industry (ACCI) said the proposed minimum tax on trusts would leave many businesses facing significant restructuring costs and stamp duty liabilities of up to 5.5 per cent, depending on the jurisdiction and the value of the asset.

It estimated about 240,000 small businesses used discretionary trusts to protect assets, manage irregular income, distribute profits, and support the continuity of family-owned enterprises across generations.

ACCI chief executive Andrew McKellar said the government’s higher taxes on small business came at “the worst possible time”. He also pointed to the new option restricted flexibility.

“The draft legislation does provide an option for small business trusts to be exempt from the minimum tax if they make fixed distributions to pre-nominated beneficiaries,” Mr McKellar said.

“Yet, this fails to recognise the variability in income of small businesses and the need for flexibility, which is why they choose to structure as a trust, so is likely to benefit few businesses.”

The tax hit on trusts was originally forecast by Dr Chalmers to raise $44.9bn for the government over the next nine years.

The government on Thursday did not release an updated figure for that revenue forecast. “The government can’t harvest that huge amount of money without leaving small businesses poorer and less competitive,” Mr McKellar said. “The government is yet to answer the question: why penalise small businesses?

“Imposing a minimum 30 per cent tax on these small and family businesses will mean they have less money to reinvest and grow, fewer opportunities to take on new staff, and reduced capacity to pay down debt.”

CPA Australia’s head of tax policy, Jenny Wong, said there were some obvious improvements to the design of the new tax, but those who did not elect the new fixed regime and rolled over to a new structure could still incur stamp duty. “The election option is a genuine improvement,” Ms Wong said. “But if you roll over to a company you still have the stamp duty problem.”

Charities that were at risk of losing billions of dollars in donations because of the higher tax on trusts also breathed a sigh of relief on Thursday. Fowler Charity Law principal Mark Fowler said the government’s exemption was important for maintaining high levels of philanthropy.

“The recognition that payments to charities will not be subject to the 30 per cent tax is a significant and welcome declaration from the government of its intent to retain existing philanthropic support of the charity sector,” Mr Fowler said. “However, the reform does not address the practical concern that businesses who have primary beneficiaries with an average taxable income below 30 per cent will restructure out of discretionary trusts.”