Hotels and tax changes

You don’t have to read too many opinion polls lately to see many Australians are fed up—and the recent Federal Budget appears to have done little to change that opinion.

Making life harder for mum and dad operators of family motels and hotels would not seem to be the way to go for a government looking to be more popular with cynical voters.

Dr Jim Chalmers may have described his fifth budget as the “most important and ambitious budget in decades”, but many have been left scratching their heads over tax changes that no one saw coming, and few understand.

Especially when it comes to the introduction of a 30 percent minimum tax on discretionary trust distributions, and the replacement of the 50 percent capital gains tax (CGT) discount with inflation indexation, and a 30 percent minimum tax on real capital gains.

These changes are a big worry for hoteliers and all business owners from the mum and dad motel owners in our regional centres to the big names like the Hiltons, Hyatts and Accors.

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And they should be.

The simple fact is hospitality operators are entrepreneurs, who often mortgage their family homes, provide personal guarantees and operate on narrow margins to build businesses that support jobs, tourism and their local communities.

That’s a big risk and tax policy should encourage such investment in communities, not reduce the rewards for long-term business ownership. Not move the goal posts mid-game.

Discretionary trusts are widely used by family-owned hospitality businesses because they provide flexibility to manage things like seasonal trading conditions and succession planning.

They also allow income to be distributed among family members who actively contribute.

The proposed 30 percent minimum tax on trust distributions would reduce this flexibility and increase the tax burdens.

Don’t forget, this comes at a time when businesses like your country motel or hotel are already facing higher wage costs, energy prices, insurance premiums, bank interest rates, fuel levies, and supply chain pressures.

Why is the Government doing this?

It says the reforms are intended to improve housing affordability by reducing incentives to invest in existing residential property.

But extending the changes to business assets, commercial property, shares, and managed investments is throwing the baby out with the bath water.

Investments in freehold property, refurbishments, accommodation developments and venue upgrades often require a lot of money upfront and take decades to generate returns. Higher taxation on future capital gains reduces the incentive to undertake these investments in the first place. You don’t need to be a genius to work out this would have a negative impact on the economy.

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Additional tax burdens may reduce asset values, discourage purchasers and limit access to finance. Lenders may respond by increasing equity requirements or reducing valuations.

Hotels or motels could be forced to pay back existing loans and have their cost of borrowing or repayments changed.

Refurbishment projects, hotel expansions and new developments are also likely to be more difficult to fund.

The proposed grandfathering arrangements create significant complexity and cost.

Owners will be required to determine the value of assets at July 1, 2027, and separately calculate gains accrued before and after that date. This just adds to the mountain of red tape they are already dealing with.

The unheralded introduction of a 30 percent minimum tax rate on real capital gains is also concerning.

Capital gains typically accumulate over many years but are taxed in a single year when an asset is sold. Applying a minimum tax rate regardless of an individual’s broader circumstances may disproportionately affect retirees, small business owners and lower-income taxpayers.

If the proposed trust and CGT changes proceed, many hotel owners will be forced to restructure from discretionary trust arrangements into alternative ownership vehicles such as fixed trusts, unit trusts or companies.

Why should hotel owners be expected to pay for this?

At the very least, the government should provide comprehensive, zero-cost restructuring relief, including exemptions from stamp duty, CGT rollover relief and other transaction taxes or charges. Businesses should not be penalised simply for reorganising their affairs to comply with a new tax framework.

Without such relief, many family-owned motels or hotels will face substantial and unnecessary costs that could run into hundreds of thousands of dollars. That’s more money which won’t be spent on from investment, refurbishment, employment and growth for that community.

Business owners generally do not receive paid annual leave, public holiday penalty rates, overtime, paid sick leave, employer superannuation contributions, or other employment benefits.

Many forgo personal income and accumulate little or no superannuation because they continually reinvest profits back into their business. For many of them, the eventual sale effectively serves as their retirement savings.

At the very least AHA and Accommodation Australia members deserve consultation around life-changing reforms.

The Government needs to talk more to business and industry groups, lenders and tax experts.

Simple changes would make a big difference.

After all, no one is going to stay in a motel or hotel that’s shut up its doors for good.