Discretionary Trust Tax Change Consultation

The Federal Treasury last week released their public consultation paper, Minimum tax on discretionary trusts.

They have advised that starting 1 July 2028, trustees of discretionary trusts will pay a minimum 30% tax on the taxable income of the trust (unless higher rates or exclusions apply). Note that draft legislation has not yet been released.

What this means for Individuals & other non-corporate beneficiaries

Trustees will be required to calculate and pay the minimum 30% tax on distributions.

Individual beneficiaries will include the taxable income in their tax returns, whilst including the tax paid on their behalf as a non-refundable tax offset. This means that if an individual’s marginal tax rate is below 30%, the excess tax offset will not be refunded – ensuring a minimum 30% tax is paid. Note the tax offset will not contribute towards the Medicare levy.

What this means for corporate beneficiaries (companies)

The changes have essentially killed off the availability of corporate beneficiaries (bucket companies) after 1 July 2028 for tax planning measures. The government has achieved this through disallowing the 30% tax paid by the trustee to be applied at the corporate beneficiary level. In other words, a distribution to a company will have the 30% tax paid by the trustee, the company will then be assessed and taxed on their distribution but cannot apply the tax offset paid by the trustee – double taxation is applied.

The Government’s stated intention behind this double taxation is to reduce tax planning opportunities and minimise the complexity in the tax system.

What trusts are excluded?

The minimum trust tax will not apply all trusts. Excluded trusts will be fixed trusts, widely held trusts, complying superannuation funds, special disability trusts, deceased estates and charitable trusts.

Some types of income, such as primary production income, will also be excluded from the minimum tax. The Government also intends to carve out testamentary trusts from this new tax measure.

Can I restructure out of my trust?

Rollover relief will be available to taxpayers wishing to restructure out of a discretionary trust into other arrangements, such as a company or a fixed trust. Treasury have advised ‘this will provide expanded relief from direct income tax consequences, including capital gains tax, and will be available for three years from 1 July 2027’.

It’s important to be aware there are potential additional costs to be considered before restructuring, these costs include legal fees, new entity establishment fees and a big one is possible stamp duty implications. Independent legal advice should be obtained where stamp duty implications might apply.

The consultation paper indicates that income tax restructure relief will be available for active businesses assets, revenue assets and passive investment assets.

There has been discussion around Dividend Access Shares (DAS) and the discretionary distribution ability that can come from DAS. Treasury have mentioned in their paper that these arrangements when rolling from a trust to a company will not be available. ‘The measure is intended to support transition out of discretionary trust structures into arrangements with more fixed and transparent economic outcomes, not a mere change in legal structure.’ The Government wants taxpayers to forego discretionary tax planning opportunities.

Should I still set up a discretionary trust or are they dead now?

Asset protection benefits associated with using discretionary trusts still remain. As a trust is a relationship, no-one actually owns a trust. Assets can be held in a trust and potentially provide greater protection from creditors than if the assets were held personally or through a company structure. However, the tax costs vs benefits need to be weighed up more carefully now. Entity structure decisions that were once a ‘no-brainer’ now require a much more holistic review.