Tax rules rewritten, trusts on life support: Treasurer’s complex Budget changes everything for middle market

The Treasurer promised an ambitious budget, but seismic might be a better word.

Jim Chalmers has remade the landscape for Australian business and investment in one speech, fundamentally changing the way that middle market businesses will operate, investments will be managed, investment decisions made and portfolio wealth will be accumulated.

There’s a runway to the change – few things kick in overnight – but with the gravity of the revisions proposed, it will be a frantic two years as businesses and individuals try to understand how they should adapt to the new systems.

CGT rules have been wound back nearly 30 years. Negative gearing will soon be a distant memory for most. Discretionary trusts will no longer be tax attractive.

In short, any generally accepted principles investors have used to guide their wealth-creation strategies in the past must now be revisited.

Use a trust structure in your business? You now must rethink whether that structure will continue to deliver the benefits it has in the past.

Hold a commercial asset such as business premises? You lose the full benefit of the 50% CGT discount on sale and future gains will be taxed based on indexation plus a 30% minimum tax on the real gain.

Distribute income via a trust to a company beneficiary? You will likely face double taxation on that distribution.

The scale of the changes will slow down business and delay investment, as the middle market tries to process the impact of the Budget, Pitcher Partners National Chairman Brendan Britten said.

“It is hard to pick a middle market business or family group that hasn’t been impacted negatively by the measures announced in the Budget, and the inevitable impact of this will be time and resources diverted from growing the business to restructuring the business,” Mr Britten said.

“When Australia is urgently facing a productivity crisis, overturning the basis on which investment is made and businesses have been built is deeply unwise.”

Two key measures that will impact middle market business include the changes to discretionary trusts and the scrapping of the 50% CGT discount regime in place since 1999.

From 1 July 2028, the trustee of every discretionary trust will pay a minimum 30% tax on the trust’s taxable income and corporate beneficiaries explicitly will not get a credit for this tax.

For a discretionary trust with a corporate beneficiary, that could represent a shift from an end-to-end tax rate of around 25 per cent to in excess of 50 per cent, with no franking credit to recover the difference.

That one move is expected to raise $4.5 billion in a single year and will apply to more than 840,000 discretionary trusts.

After 28 years, the 50 per cent CGT discount will be retired and from 1 July 2027, future capital gains will be subject to cost-base indexation for assets held by individuals, trusts and partnerships, alongside a new 30% minimum tax on realised capital gains.

Pre-1985 assets, which have been exempt from CGT for four decades, will be brought into the regime, and will attract tax on any growth from 1 July 2027 onwards.

The combined changes will be complex to assess and businesses will need individual modelling to consider future tax liabilities under this new regime, against the costs associated with restructuring – such as stamp duties, as well as the potential flow-on consequences for estate plans and succession planning.

“This decision represents an attack on discretionary trusts, and an attempt to blunt force Australians to restructure from trusts to companies,” Mr Britten said.

“This is less about levelling the playing field and more about flattening aspiration, creating a multi-generational tax burden that significantly blunts the incentive to invest, innovate and save.

“Business founders who structured their investment through a trust instead of a company, a decision made in good faith based on a known framework, are now being penalised retrospectively.”

Some businesses might benefit from the R&D Tax Incentive overhaul, which lifts the SME threshold from $20 million to $50 million, enabling more middle market firms to qualify for the SME offset rate.

A smaller subset will benefit from the venture capital cap changes, with a greater proportion of middle market businesses eligible for investment with full incentives.

But investment capital would be right to be more wary in the wake of this Budget.

Companies that are dividend-heavy will gain more love from investors, while those focused on high-growth have become less attractive.

An increased compliance burden is also the underlying story of the night.

Every CGT asset held at 1 July 2027 either needs a valuation or an apportionment calculation. Every R&D claim will need to be reworked to strip out supporting activities, which will no longer be eligible for the incentive.

There are staggered start dates for a range of business changes, but in the next 18 months, businesses will need a top to bottom review of their structures, operating position and strategic plans.

“There is also likely to be a period of vigorous consultation that may ultimately influence the final form some of these announcements ultimately take” Mr Britten said.

“It is vital that investors and businesses act immediately to understand the potential implication of these changes on their circumstances, and to consider their strategies,”

“This is not a Budget where you can sit on your hands and hope policy positions revert to the status quo. Businesses need to understand their current structures, carefully consider their potential exposure, and take steps to ensure they are not unreasonably impacted by this change.”