The debate around the federal government’s changes to trusts, negative gearing and Capital Gains Tax has people all fired up about broken promises, attacks on aspiration and asset protection.

But as a tax academic, and someone who utilises a discretionary trust, I support these changes as (mostly) in the nation’s best interest.

Yes, I will be adversely affected by the new rules, but teaching the ins and outs of taxation in my role at Bond University means I have an acute understanding of how broken Australia’s tax system really is.

I do not necessarily agree with all the changes, and I believe some do not go far enough, but it is important to debunk some of the agenda-driven information spreading across mainstream and social media.

Trusts and asset protection

Discretionary trusts are legal tax avoidance, I absolutely stand by that description.

There are legitimate cases for trusts, such as special disability trusts, but these are not affected by the changes, nor are unit trusts or listed trusts.

In unit trusts, ownership is divided into set units held by investors, similar to shares, with the trustee managing the underlying assets on their behalf. Unit trusts that trade units on the ASX are known as listed trusts. 

The government’s proposed changes target discretionary trusts, which differ in that beneficiaries do not have a fixed entitlement, such as owning say 10 per cent of the units, and the trustee has full discretion over who receives entitlements and how much.

Discretionary trusts are the only common entity type that allows the decision maker (trustee) to decide at the end of the year where the income is going to be distributed. Proprietorships, partnerships and companies have fixed distribution patterns.

One of the key arguments being put forward is that small businesses need access to discretionary trusts for asset protection.

That is simply not true; there are other solutions that would enable them to protect assets, including moving to a corporate structure or unit trust.

The complaints arise from the fact that these solutions reduce CGT advantages and are not as effective at minimising tax, which is the government’s entire point.

Companies will, and should, become more popular.

Treasury data makes it clear who is getting the most benefit from discretionary trusts – those on the highest incomes.

“By income level, 30 per cent of individuals reporting trust income in 2022-23 had taxable income between $0 and $45,000, with this cohort receiving 7 per cent of all trust income. 59 per cent of individuals reporting trust income had taxable income between $45,000 and $200,000, and this group received 47 per cent of total trust income. Around 11 per cent of individuals reporting trust income had taxable incomes above $200,000, and together this group received 46 per cent of total trust income.”

The use of discretionary trusts is a loophole being exploited (mostly) by the very wealthy that the government proposes to close.

CGT impact on low-income earners and pensioners

Again, according to the Treasury’s numbers, the impact of this proposed change is largely to those on the highest incomes.

Some 83 per cent of the CGT benefit goes to the top 10 per cent of income-earners. Of course, the capital gain received by these taxpayers could be the cause of their high income for that year.

However, these researchers confirm the 50 per cent CGT discount disproportionately benefits a very small number of high-income earners.

Changes to non-property assets, such as shares, will affect those earning less than $45,000, but not individuals on government income support or pensioners.

Many pensioners do own significant shares, but they will not be impacted by these proposed changes, and franking credits are not affected.

The data shows people aged between 60 and 64 received 20 per cent of the CGT discount benefit.

What the government is proposing aims to limit people obtaining a negative gearing benefit when they have a high marginal tax rate during employment, then selling their asset when they have a low marginal tax rate in retirement.

The current tax rules encourage this behaviour – it is a strategy I have advocated and supported for years. Because it makes sense.

Importantly, many people sell their businesses when they retire to set themselves up.

Small business CGT concessions available through section 152 of the Income Tax Assessment Act 1997 will not change under the new rules.

These CGT discounts apply to small businesses with, among other tests, turnover under $2 million.

These discounts stack on top of the 50 per cent CGT discount. In my view, an increase to these test limits would be fairer and enable more people to access these discount provisions upon retirement.

What about young people and house deposits?

With the cost of housing and lending rules, those earning under $45,000 will struggle to access finance for a mortgage.

This means they are unlikely to realise sharemarket gains until their income reaches a point that enables them to get a loan (i.e., over $45,000), which means they would pay the 30 per cent rate anyway.

From this perspective, it’s hard to see how the proposed changes will prevent young people using shares to save for home ownership.

Buying shares to save for a deposit remains a sound strategy and the proposed 30 per cent minimum tax will have little to no impact.

There is a lot of heat in this debate, but many of the loudest voices have their own agendas when highlighting edge cases, offering up simplistic takes or even outright misinformation.

As a tax practitioner turned academic teaching Australia’s tax system, I welcome a government finally making structural changes. But there is still so much more that can and should be done.

While I may personally lose out with some of these changes, society wins.

Dr Mark Brosnan is a certified practising accountant and Assistant Professor of Accounting at Bond University