When the federal government announced plans to impose additional tax on superannuation earnings linked to balances above $3 million, most Australians paid little attention.
The government claimed the changes would only impact a small group of wealthy people, and by the time the full implications of the policy were starting to be more broadly understood, it was too late. While the legislation was revised, it was still flawed when it was introduced last year.
My public opposition to the policy was multifaceted, but one of the key concerns was the changes would set a dangerous precedent for the government to tinker with other investment and family structures. We’re now seeing that unfold with the proposed tax measures outlined in the most recent budget targeting discretionary trusts, capital gains tax (CGT) concessions and negative gearing, albeit with some government concessions following backlash.
The government claims the reforms will improve fairness and housing affordability, particularly for younger generations, however, as with superannuation, I fear the long-term implications will broadly fall on families, small businesses, investors and retirees – a pattern now expanding into the broader economy.
Trusts are more than tax minimisation
The proposed 30 per cent minimum taxation framework for discretionary trusts, if implemented, could have some of the widest implications for Australian family groups and small businesses.
While the government has since moved to exempt genuine testamentary discretionary trusts from the proposed regime, significant concerns remain for families and businesses that rely on discretionary trust structures for legitimate commercial and investment purposes.
It is inaccurate to suggest discretionary trusts exist only to minimise tax. Many are used for legitimate commercial, investment and family wealth purposes, including asset protection, support for single-income households, wealth building and preservation, and estate and succession planning.
In fact, many so-called mum and dad businesses use family trusts, with beneficiary companies serving as investment vehicles to retain capital for future growth.
The proposed measures could force these family businesses into corporate restructures that deliver largely similar economic outcomes, while imposing significant restructuring and compliance costs, and potentially additional stamp duty.
The government’s decision to exempt genuine testamentary discretionary trusts is a welcome acknowledgement of the important role these structures play in protecting dependent beneficiaries and supporting effective estate planning. However, that should not distract from the broader implications the proposed changes may have for ordinary discretionary trusts used by family groups and small businesses across Australia.
There has also been little discussion about the impact on single-income households, where one spouse earning little to no income may still find the family unit facing top marginal rates, Division 293 tax, reduced investment deductions and diminished CGT concessions.
This is not a tax system aimed only at the wealthy; it increasingly punishes families who build businesses, save for retirement and seek financial self-sufficiency.
Policy uncertainty and the growing advice vacuum
When the superannuation changes were first announced it created an extended period of uncertainty around who would be impacted and what the changes would mean for long-term retirement planning and intergenerational wealth decisions, investment structures and contribution strategies.
The government’s proposed budget reforms risk creating a similar environment.
The changes could represent one of the most significant shifts in Australian taxation policy in decades, yet uncertainty remains around their full impact and whether they will be amended, delayed or implemented within the timeframe first outlined.
Added to this is a growing advice vacuum, where professionals such as accountants, financial advisers and legal teams must attempt to provide definitive, long-term guidance, despite the current uncertainty.
Advisers may increasingly be forced to defend advice given in good faith, despite shifting goal posts and limited clarity around future policy decisions.
As we learned from the changes to superannuation, meaningful reform requires proper consultation, genuine engagement, legislative clarity and reasonable implementation timeframes before major structural changes are treated as settled policy.
Taxation reform impacts the entire economy
As a superannuation expert, I have watched with interest as the sector digests the government’s decision to carve genuine testamentary discretionary trusts out of the proposed minimum tax regime. While that removes one important concern, broader uncertainty remains around the treatment of ordinary discretionary trusts and related investment structures.
Already questions are being asked about what the impact will be on long-term retirement planning, investment structures and family wealth decisions. While the exemption for testamentary discretionary trusts removes one significant concern, the broader uncertainty surrounding the reforms continues to make long-term planning more difficult for families, businesses and their advisers. Once again, I fear the proposed taxation changes will discourage Australians from working hard, taking risks and getting ahead.
There’s also a broader risk in that investors, entrepreneurs and self-funded retirees may shift capital out of Australia to more competitive jurisdictions. That would affect the economy and the government’s bottom line if forecast tax revenues are not realised, increasing the risk of further policy changes to make up the shortfall.
Taxation reform is possible and, with the right consultation and implementation process, can have beneficial impacts on the broader economy. Even after the recent amendments and exemptions, I believe the measures remain economically unsustainable and fall short of meaningful tax reform.
The government made a significant mistake in implementing changes to superannuation. We shouldn’t stand by and allow another one to be made.
Naz Randeria is managing director of Reliance Auditing Services.