FAAA calls for rethink on trust tax overhaul

The Financial Advice Association (FAAA) has urged the federal government to reconsider its proposed minimum tax on discretionary trusts, warning the reforms could impose significant costs on small businesses, financial advisers and lower income Australians while failing to adequately target tax ministration.

In its submission to the Treasury consultation on the proposal, the FAAA outlined several recommendations, including extending transitional relief, broadening exemptions and redesigning how corporate beneficiaries are treated under the reforms.

FAAA chief executive Sarah Abood said the association supports measures to address inappropriate tax minimisation but believes the current proposal would have unintended consequences.

"The FAAA appreciates the government's objective to address tax minimisation through income splitting arrangements, however we are concerned about the potential broader consequences of this reform," Abood said.

The association said many financial advisers and small business owners operate through discretionary trusts for reasons extending beyond tax, including asset protection, succession planning and family ownership arrangements.

Among its recommendations, the FAAA called for the transition period to be extended from three years to five years, greater flexibility in rollover relief provisions and coordination with state governments to provide stamp duty relief from businesses forced to restructure.

It also argued the proposed treatment of corporate beneficiaries, which it said could result in an effective tax rate exceeding 55%, should be reconsidered.

The association warned around 350,000 active small businesses could be forced to decide whether to retain their trust structures or transition to companies, creating significant legal, tax and administrative costs.

It further argues the reforms would disproportionately affect lower and middle-income beneficiaries, including retirees, university students, stay at home parents and people temporarily out of the workforce, who may be unable to fully utilise non-refundable tax offsets.

"The reasons for taking the minimum tax on discretionary trusts approach has not been adequately consulted on or demonstrated to be appropriate," Abood said.

The FAAA said it remains open to alternative reforms that better target tax avoidance while preserving the legitimate commercial and succession planning benefits for discretionary trust structures.