COSBOA is warning proposed trust tax changes go far beyond a tax discussion.
For hundreds of thousands of small business owners operating through trust structures, a proposed change to how trusts are taxed is presenting a difficult decision: absorb a significantly higher annual tax bill, or pay up to $50,000 to restructure the business entirely.
The Council of Small Business Organisations Australia (COSBOA) is raising the alarm, arguing that while the public debate has focused on tax outcomes, the practical consequences for small operators have received far less attention.
COSBOA CEO Skye Cappuccio said many business owners were only beginning to understand the full scope of what could be involved. “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,” Cappuccio said.
She added that for genuine small businesses, the conversation had moved well beyond tax. “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.”
The real cost
For businesses that choose to restructure rather than absorb higher tax, the process is neither simple nor cheap. Depending on the circumstances, restructuring can involve changing a business’s legal structure, 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.
Eddie Griffith, Chair of the Affiliation for Business Resilience and Turnaround (ABRT), warned the proposed changes could trigger a surge in restructuring activity across the small business sector. “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.”
The impact is not theoretical. COSBOA has shared the case of a husband-and-wife team currently receiving trust distributions of around $113,000 between them, with no other income. Under the proposed changes, their combined annual tax bill would rise from approximately $16,895 to around $36,160, an increase of $19,265 every year, more than doubling their current liability. They say the additional tax would reduce funds available to reinvest in the business and place greater pressure on household finances.
Who is affected
COSBOA is clear that the businesses in the frame are not passive investment vehicles or large corporations using trusts for tax minimisation. They are small operators 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,” 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.”
Cappuccio said many of those businesses were already under pressure. “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.”
What COSBOA wants
COSBOA is calling on the government to consult further with the small business sector before any legislation is introduced, to ensure reforms do not create unnecessary compliance burdens or force costly restructures, and to target any integrity concerns directly rather than applying what it describes as a blunt measure to genuine small businesses.
The organisation acknowledges the government has indicated further consultation on trust taxation will occur in the coming weeks and says it looks forward to engaging in that process.
Cappuccio’s message to policymakers was direct. “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.”
