Three in five construction businesses in Australia would be impacted by Labor's proposed tax hike on trusts, hurting housing supply, the building sector has said.
The Housing Industry Association has urged senators to reject the federal government's proposal for a 30 per cent minimum tax on trusts at a committee hearing on Thursday.
The changes would further put the nation's target of 1.2 million new homes by mid-2029 out of reach, the association's managing director Jocelyn Martin told the committee.
The property industry has been railing against Labor's changes to negative gearing and the capital gains tax for investors, which they argued will also reduce the feasibility for developers to build new homes.
While the sector lost the battle on the changes to property investor tax breaks, Labor's changes to trusts are yet to secure the support of the Senate.
"Our industry is exhausted. Just once, we'd like to be sitting here considering a bill that proposed to increase housing supply, improve productivity, and encourage investment," Ms Martin told the inquiry.
She called for the legislation to be thrown out entirely, but lamented that the changes were another "rush job" heading for what seemed like a foregone conclusion.
If the reforms did proceed, she asked that current tax settings be grandfathered to allow existing businesses with discretionary trusts to continue trading.
"A national survey of HIA members indicates that about three in five construction businesses are using a trust structure," Ms Martin said.
"Just to seek advice, let alone comply, will cost businesses thousands of dollars and add to the cumulative impact of constant regulation on small business. Wrong change at the wrong time is what this is."
Labor flagged in the May budget it was making the change due to the large number of wealthy Australians using discretionary trusts to split their income and reduce their tax bills, which was placing a greater burden on workers.
While business advocates and accounting groups conceded there was a genuine argument to clamp down on income splitting, they argued there were also genuine reasons for small businesses to use trusts.
Council of Small Business Organisations Australia chief executive Skye Cappuccio said the tax changes would punish business owners who used the legal framework for asset protection, succession planning and continuity.
She called for the changes to be grandfathered for small businesses with an annual turnover of less than $10 million.
The changes would result in some business owners facing a much higher tax rate, effectively forcing them into a costly restructuring exercise.
In one example, a husband and wife earning $200,000 between them would each pay more than if they had been making $220,000 a year as employees, Ms Cappuccio said.
Matthew Addison, executive director of the Institute of Certified Bookkeepers, encouraged the government to instead lean on existing anti-avoidance provisions to clamp down on income splitting.
"This blunt instrument of tax on trusts we do not believe is justified and will have significant downside on the small business sector," he said.
The Labor-led committee will hand down its recommendations on November 13.
