Jim Chalmers’ “rollover relief” for trusts changing their structures to avoid his tax raid will lead to lost productivity as thousands of builders and other businesses could be left waiting for their licences to be renewed and adding administrative costs, business warns.
The Queensland government also punched a hole in the Treasurer’s plan to limit or eliminate restructuring costs for affected businesses, saying trusts using the rollover relief could still be subject to state stamp duty depending on how individuals within the trust were treated.
Other state governments have left open the door to charging stamp duty but the intervention from Queensland’s Liberal National government marks the most stark pushback to Dr Chalmers’ proposed compromise.
Labor last week released long-awaited draft legislation for its budget pledge to introduce a 30 per cent minimum tax on discretionary trusts.
The announcement was met with criticism from small businesses and start-ups given many businesses were held in trusts and the proposal would therefore jack up their tax rates.
The draft legislation last week included expanded options to limit or eliminate those restructuring costs. But state governments and experts have cast serious doubts that trusts that do choose – under the proposed scheme – to fix annual distributions would actually avoid state stamp duty.
The Queensland government on Monday did not confirm that changing structure from discretionary distributions to fixed distributions under the draft legislation would actually help the business avoid stamp duty, instead saying it would depend on individual circumstances.
“It is up to the federal government to consult with industry and Jim Chalmers to explain how his changes interact with Queensland law,” Queensland Treasurer David Janetzki told The Australian.
“Jim Chalmers’ budget decisions have left a mess and Queensland taxpayers should not have to clean up after him.”
According to Queensland Treasury, the question of whether changing from discretionary distributions to fixed distributions would attract stamp duty would depend on individual circumstances, the operation of the federal legislation, and how this would interact with Queensland laws.
When contacted for comment, Dr Chalmers’ office pointed to a letter he wrote to Mr Janetzki in which he told him that he was “extremely concerned that despite Queensland’s many strengths and despite substantial and increasing commonwealth support, your budget position has experienced a sharp deterioration according to S&P and the state government risks having its credit rating downgraded”.
The federal government maintains that the election option is not expected to result in any state or territory stamp duties.
Experts and business groups are also raising concerns that government rollover relief is not enough and that it does not take into account the various licensing and insurance schemes for which businesses will have to account.
This is of particular concern for home developers. Master Builders Australia, the industry association, estimates 20 per cent of its member organisations are held in discretionary trusts.
“It’s another layer of complexity for the industry to deal with, another disincentive to get on with building the homes that everybody needs rather than encouraging and supporting these businesses,” Master Builders national director of policy and legal Melissa Byrne said.
“If you want someone to build your house for you in New South Wales, for example, the builder that you engage to do that is required to hold a builder’s licence.
“In most jurisdictions, you need warranty insurance or home warranty insurance or builder’s indemnity insurance.
“It’s not as simple as just transferring the entity.
“The state-based authorities won’t sort of let you transfer a licence because it’s a completely different entity. You’ve got contracts and things entered into with that specific entity, with that specific licence.
“If you close that down, it no longer exists and you need to get a new licence that is attached to that new entity.
“It’s costly, time-consuming. The different jurisdictions will have different eligibility criteria for those licences that you need to satisfy. It will also differ across the country as to whether or not they will take into account your past business experience under that previous entity.”
BDO Australia tax partner Anthony Sloan said restructuring a business from a discretionary trust to a company was “not a simple administrative exercise that can be achieved by making an election”.
“Where the trust carries on an active business, the restructure may require the assignment or novation of customer contracts, supplier arrangements, leases, licences and permits, together with the transfer of employees and compliance with employment law obligations,” he said.
“Regulatory approvals may also be required and, in some cases, counterparties may refuse to consent to the transfer.
“The practical reality is that moving a business from a trust to a company can involve significant legal, commercial and operational work, cost and disruption.”
CPA Australia head of tax policy Jenny Wong said while there was rollover relief thousands of businesses who do decide to rollover to a company structure would face licensing issues.
“Move the business into a new company and you’re a new legal person,” she said.
“In most cases that means a new application, not a transfer.
“For a builder, that means satisfying financial requirements from scratch with no trading history. For a training provider, it means you can’t teach until the new registration is approved. The rollover fixes the tax bill. It doesn’t get you your licence back.
“The government has accepted that restructuring out of discretionary trusts requires transitional support. That is the purpose of the time-limited restructure rollover.
“The rollover, however, addresses only the income tax and capital gains tax consequences of a restructure. It does not address the regulatory consequences that arise when the legal person conducting the business changes.”
Opposition Treasury spokesman Tim Wilson accused the Treasurer of having “laid tax landmines throughout the budget and they’re exploding on small business”.
“Every time he tries to detonate them, it just reveals more landmines and that he never understood his budget and the changes he proposed,” he said.
“Small businesses have already had to pay tens of thousands to get advice, and now they’ll continue to be exposed to higher taxes because the Treasurer can’t kick his spending addiction.”
Dr Chalmers’ office said the changes were “all about delivering a fairer tax system and helping fund tax cuts for workers by better aligning the tax rate on trust income with tax rates paid by workers”.
“The draft legislation includes expanded options to limit or eliminate restructuring costs for small businesses and others using discretionary trusts,” a spokesman said.
“The new election option means discretionary trusts would be exempt from the minimum tax and would not require a restructure. Expanded rollover relief will be available for three years from July 1, 2027, to assist taxpayers that wish to restructure out of a discretionary trust into other arrangements. Treasury is consulting on the draft legislation and we encourage stakeholders to engage with them early.”