Usually by July, the Federal Budget would be a thing of the past, but not this year. We’re still having daily conversations with clients asking, “Am I in the best structure?”, “How do trust changes impact me?”, and “Should I sell my asset now to avoid capital gains tax changes?”
Let’s talk through a few of the key changes, and what you should be discussing with your accountant:
Operating through a family trust?
Many small family businesses operate through a family, or discretionary, trust. These structures can be highly effective for distributing varying amounts to family members based on their workload or personal circumstances. However, the proposed minimum 30% tax on trust distributions, currently expected to apply from 1 July 2028, may change the benefits of these entities for you, particularly if you have lower income family members.
Here are some of the key areas worth considering right now:
- Franking credit refunds: Refunds of excess franking credits may no longer be available to family trust beneficiaries from 1 July 2028. What is the alternative if a beneficiary’s tax rate sits below the 30% minimum? Should you pay family members as employees instead, and what are the superannuation implications? What is the ultimate trade-off?
- Bucket companies: There is still some uncertainty around how distributions to “bucket” companies or corporate beneficiaries will be treated. Based on the information released so far, there may be additional tax to pay, making this strategy far less appealing. Combined with strict loan requirements between entities, distributing to a corporate entity may become much less common.
- Religious beneficiaries: Under certain trust provisions, you can distribute an amount from your trust to a religious organisation. In some circumstances, these organisations can even apply to have franking credits refunded due to their tax-exempt status. Will this change? We don’t have the full details yet. It may be that the trustee needs to pay a 30% minimum tax on these distributions. The ATO have recently taken submissions on these changes, so let’s see what comes out of this.
- Restructure relief: The Government has flagged a three-year window in which businesses operating through family trusts may be able to restructure using rollover concessions. This is expected to commence on 1 July 2028, but full details on how this will look have not yet been released.
In general, trading through a family trust can restrict future succession opportunities, such as introducing equity stakes for key employees. If you have the perfect future owner lined up, restructuring your entity and managing the associated capital gains tax (CGT) considerations can be complex. We encourage you to consider whether trading from a family trust remains right for you, both now and in the future.
Capital Gains Tax on your business: Buying, holding, or selling equity?
The proposed capital gains tax changes will affect business owners at every stage of ownership, whether you are buying a business, gradually selling down to a new owner, or planning to remain an active owner for many years to come.
Selling equity
If you are likely to sell equity over time (such as through a succession plan), it is important to understand how your transactions will be taxed and how reducing your ownership might change your eligibility for small business CGT concessions. Currently, if your ownership drops below 20%, it can trigger significant changes. Speak to your accountant early to manage your potential tax liability.
Knowing your cost base
While there is a lot of talk about valuing rental properties as of 30 June 2027 or 1 July 2027, it is equally, if not more, important to have your business valued. Up until that date, the 50% general discount is likely available to you. After that, indexation applies. Our calculations show this can make a dramatic difference. Having a documented valuation in an ATO-compliant report protects you and provides the best opportunities to minimise your capital gains tax down the track.
Buying into a business?
Incoming equity holders should carefully consider the best entity for holding their equity. In the past, a family trust would have been the automatic choice, but it requires much closer scrutiny these days. You should seek advice tailored to your specific personal circumstances.
Existing shareholders?
Even if you are the 100% shareholder of your business with no plans to sell, it pays to be prepared. Understanding and documenting your cost base is vital, not just for your own future CGT events, but for your family if the unexpected happens. Don’t assume your accountant has this on record. Discuss it, document it, and keep it safe. As an example, I have my own cost base printed out, verified, and stored with my will.
Changes to the small business CGT concessions
Following industry backlash, the government has strengthened small business CGT concessions, increasing the small business turnover threshold from $2 million to $10 million. However, gaps remain depending on how the business owner is transacting, for example, are they selling shares, or selling the business assets out of the entity? Are they a ‘significant individual’? It is always best to get personalised capital gains tax advice and stay in close contact with your accountant in the lead-up to any business sale.
If you have any questions or want to know where you stand, reach out to your local Accru Office.
