CPA Australia says trust tax bill still has key design flaws

The trust tax legislation introduced to parliament is “materially better” than the policy announced in the budget, but key design issues remain unresolved for family businesses, said CPA Australia.

The association said the government had responded to concerns from professional and business groups by making the election process more flexible.

“Government has listened, and this bill is better for it – but better isn’t the same as ready,” said CPA Australia Tax Lead Jenny Wong.

“Family businesses are still being asked to make decisions they can’t take back before the rulebook is complete.

“We support dealing with inappropriate income splitting. The test has always been whether the design does that simply, fairly and in proportion. On that test, there is still work to do.”

CPA Australia welcomed changes made during the consultation process, including greater flexibility in the election arrangements.

“Existing family trusts can elect to fix their beneficiaries’ shares and stay outside the minimum tax without restructuring,” Wong said.

“Today’s Bill makes that election more flexible.

“Charities can be nominated as a group, capital gains and franked dividends can be streamed to nominated beneficiaries.

“In addition, trusts no longer have to hand out a share of their capital every year, more family companies can be nominated and the Commissioner of Taxation can forgive honest mistakes that would otherwise end the election,” she said.

The legislation also excludes genuine testamentary trusts, distributions to charities and child maintenance trusts.

It provides further relief for restructuring, including refunds for excess franking credits and relief from family trust distribution tax through the restructure roll-over.

Treasury’s analysis of the bill refers to CPA Australia’s estimate that restructuring a family business can cost between $6,608 (A$9,536) and A$23,436.

However, CPA Australia said four significant issues still required attention.

The first is the rigidity of the election process in some family circumstances.

“The election can be made in one year, and shares cannot follow a grandchild born later,” Wong said.

“For example, a family that elects in 2029 and welcomes a grandchild in 2031 shouldn’t have to choose between leaving the child out or losing the election.”

The second concerns potential double taxation for family companies. Income is taxed at 30% in the trust and then taxed again when distributed to a family company, with no credit for the tax paid initially.

The third issue is that the supporting rules remain “unfinished, and growing”.

“The Bill leaves 12 rules to be made later by the minister, up from ten in the draft law,” Wong said.

The final issue is the treatment of stamp duty when businesses restructure, along with the need for a new entity to apply again for licences.