The message accompanying the new trust rules is that there is an easy option with no stamp duty. That is true as far as it goes. It is also the wrong thing to be deciding on.
When the draft legislation for the trust minimum tax was released, it came with a reassurance. If you do not want to restructure your business, you can simply make an election instead. No restructure, and no state stamp duty.
That is accurate. It is also a very small part of the decision.
The election requires you to nominate, permanently, who receives the income of your trust and in what proportions. Most people looking at this will nominate a company, because that lets profits be retained at the company tax rate rather than taxed at personal rates. On the income side, that is an obvious move.
The election does not stop at income. Whatever percentage you nominate for income applies to capital as well. Nominate a company for 40 per cent of the income and you have also committed 40 per cent of the eventual sale proceeds of your business to that company.
That matters because of how the small business capital gains tax concessions work. Sold out of a family trust, the exempt amounts can generally reach the owners personally, tax free. Where they land in a company, a substantial part cannot be passed on without a further round of tax.
Here is the part that is hard to see coming. On a small enough sale, both routes can end up with no tax paid at all. The difference is not the tax bill. It is where the money ends up.
If you are under 55, anything sheltered by the retirement exemption must go into superannuation, so it is not money you can use now. Sold out of a family trust, our café owner has about a quarter of the proceeds preserved in super and the rest in hand. Sold out of a company, and after that company is eventually wound up, closer to two thirds is locked away. The retirement exemption also carries a lifetime limit that is never replenished, and the company route uses roughly two and a half times as much of it on the very same sale.
The same issue arises with the other option. Moving the business into a company means stamp duty may be payable now, in cash, and the company cannot access the same capital gains tax relief on sale that a trust can. The Commonwealth relief covers income tax. It cannot touch state duty, because that is not the Commonwealth's to give.
The right starting point is not which option avoids stamp duty. It is this: what happens when this business is eventually sold, and who will the money need to reach?
For some owners, the answer makes a company entirely sensible. For others, particularly where the business has been built from nothing and its value is almost all goodwill, the structure that saves tax on income each year can cost far more than it saves when the business is sold.
There is time. The election cannot be made until the 2028–29 year and the roll-over runs to June 2030. But the decisions are effectively permanent once made, and some of them depend on arrangements being in place well before 1 July 2028.
Before you choose between the election and the roll-over, let us model what each one does to the eventual sale of your business. Both choices are effectively permanent, and the cost of the wrong one does not surface until you sell. If you operate through a family trust, this is worth a conversation now rather than in 2028.
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