One of Australia’s leading accounting firms has proposed an alternative tax model for trusts that could potentially generate higher government revenue than the current plan outlined by the Albanese government, while the peak body for small businesses has strongly criticized the draft legislation, arguing it unfairly targets family enterprises.

The government’s May budget introduced a measure to impose a minimum 30 percent tax rate on trust distributions and capital gains. Last week, Treasurer Jim Chalmers offered trusts an exemption if they shifted to a fixed regime. However, this fixed elective regime has faced criticism because adding new members—such as a newborn, an adopted child, or a returning family member—could trigger the minimum 30 percent tax as well as a punitive 47 percent tax rate in the first year of change.

Alexis Kokkinos, a tax partner at Pitcher Partners, described the government’s proposed fixed elective regime as suboptimal and offered a different framework. Under Pitcher Partners’ alternative, trusts would pay tax at a flat 30 percent rate, creating a non-refundable credit that passes through to the corporate beneficiary and ultimately to shareholders. This approach aims to achieve the same policy goal of a minimum 30 percent tax on trust income distributed through corporate beneficiaries, but without requiring taxpayers to make formal elections or restructure their affairs.

“The alternative presents a simpler implementation and preserves the minimum 30 percent tax outcome while reducing administrative complexity,” Kokkinos said. In contrast to the government’s plan, which allows trusts to direct income distributions to a company taxed at 25 percent—generating potentially refundable franking credits—the alternative model avoids refundable credits and the need for trusts to elect into a fixed regime.

Kokkinos emphasized that if Treasury wants to reduce red tape and deliver efficient tax changes with minimal business disruption, the firm’s model should be seriously considered, noting it could raise more revenue than the existing proposal.

The tax changes aimed at trusts were expected by the government to raise approximately AUD 44.9 billion over nine years, though this estimate has not been updated since the initial announcement.

However, the Council of Small Business Organisations Australia (COSBOA) has submitted a strong rebuttal to the government's proposals. Chief executive Skye Cappuccio described the 30 percent minimum tax on discretionary trusts and the 47 percent tax applied to businesses transitioning into the fixed regime as “punitive and unnecessary,” highlighting that these measures reduce flexibility for family and small businesses.

“The penalty of 47 percent tax in the year a change is made is unworkable for many small businesses,” Cappuccio said. “Why should a business be taxed at the highest marginal rate simply because they need to modify their arrangements? The proposed options all diminish the ability of small firms to adapt.”

Cappuccio also challenged the government to provide evidence of significant integrity problems within the trust system to justify the new measures. She advocated for a targeted approach to address any specific abuses rather than a broad-based minimum tax rate that could adversely affect hundreds of thousands of small businesses.

As the government considers feedback on its trust tax reforms, the debate underscores the competing priorities of revenue generation, administrative simplicity, and preserving flexibility for small businesses and family trusts.