Labor open to exempting inheritance trusts from new minimum tax

Labor has not ruled out exempting a type of trust used by some Australians to distribute inheritance from a new minimum tax, as capital gains carve-outs for startups loom.

The federal government has left the door open to further changes after coming under pressure for including future discretionary testamentary trusts in a new 30 per cent tax announced in the budget.

The trusts are created through a person's will and activated upon their death, allowing the trustees to flexibly distribute the assets as they choose.

As Labor works to finalise carve-outs for startups that would be disproportionately impacted by its plan to tie the capital gains tax (CGT) discount to indexation, debate is also emerging about how the new system deals with certain losses in investment shares.

On Friday, Prime Minister Anthony Albanese appeared open to amending Labor's current plan regarding discretionary trusts when asked if he was considering an exemption for new testamentary ones.

"On trusts, there'll be a consultation period about that, and we made that clear on budget night," he said.

Labor to consult on trusts after Coalition 'death tax' attack

Of the 1 million trusts in use in Australia, about 10,000 are discretionary testamentary — all of which are exempted from the new tax.

But future trusts of that type would face the minimum 30 per cent tax, leading the Coalition to accuse the government of introducing a "death tax by stealth".

Mr Albanese said Labor was "not interested" and there were "no measures" in the budget that were "going to hurt inheritances".

"We'll work through the [trusts] legislation, we've said will be introduced in the second half of the year," he said.

The suggestion of consultation on the trust changes is a shift from a week ago when Labor was arguing people could switch to a fixed trust to escape the new tax.

"People will have the choice to set up a fixed testamentary trust if they want to avoid paying the minimum tax," Treasurer Jim Chalmers said last Friday.

On budget night Labor confirmed discretionary trusts related to things like deceased estates, vulnerable children, disability, charity and agriculture income would all be exempt from the 30 per cent tax.

Opposition Leader Angus Taylor said on Friday Mr Albanese was "scrambling for an exit" on what he has dubbed Labor's "toxic taxes" because the PM was "starting to hear the impacts they will have".

"He didn't think about it beforehand," Mr Taylor said.

"The treasurer clearly didn't think about all of this beforehand."

Mr Taylor said the tax plan needed an "axe" not a "carve-out".

"These taxes must go," he said.

Labor minister says CGT carve-out for startups 'valid'

The government is also consulting with startups over carve-outs to protect new businesses from unintended consequences of the CGT changes in the budget.

Assistant Minister for Science Andrew Charlton said the new CGT regime, which only allowed businesses to deduct inflation from their gains, "doesn't interact well" with small businesses, like startups, that have a low capital base.

"I think there are real concerns," he said, noting the government had signalled on budget night there was ongoing work to address the issue.

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"We've got this new type of capital gains discount which is based on inflation, and the point that many startup founders, the point that many small businesses have been making is valid," Mr Charlton said.

"It's a valid point because that new regime doesn't interact well if you have a really low capital base because you've got nothing to inflate off."

The government is intending to introduce legislation to change CGT and scale back negative gearing to parliament in the first week of June.

CGT concerns about share losses as Treasury insists 'no change'

But criticism of the CGT system has started to expand, with one tax expert questioning the way losses from shares would be treated.

Writing in the Australian Financial Review this week, former Treasury tax expert Geoff Francis has suggested a diversified portfolio of shares would "likely fare far worse" if the CGT system reverted to include a "little-understood feature" of the pre-1999 rules.

He said the system could "over-tax shares with low per-year capital gains in a diversified portfolio" because investors often hold a mix of winners and losers, rather than a single asset steadily rising in value.

Mr Francis said the system treated "real losses versus real gains" unevenly, meaning some share investors could end up paying tax above their actual inflation-adjusted return.

The argument has caught the attention of other economists, but a Treasury spokesman said the government was "not changing how losses are calculated".

"Under indexation, an investor does not have a capital loss if their gain is positive but less than inflation," the spokesman said.

"However, they will no longer pay any tax on a gain in this situation, where they do currently under the 50 per cent discount.

"Tax paid across a portfolio of assets depends on a range of factors including rates of return, inflation and holding period."