The Proposed 30% Minimum Tax on Discretionary Trusts

The Proposed 30% Minimum Tax on Discretionary Trusts

Just announced this week, draft legislation and explanatory materials with 15 DAY Consultation period!! Unbelievable! It proposes an alternative to restructuring that would allow existing discretionary trusts to avoid the 30% minimum tax by fixing beneficiaries’ entitlements to income and capital, an apparently simple election with potentially significant long-term consequences. 

From 1 July 2028, the Government is proposing a 30% minimum tax on the taxable income of most discretionary trusts.Under the core proposal, the trustee would pay sufficient tax to bring the tax on relevant trust income up to 30%. Non-corporate beneficiaries would receive a non-refundable tax offset representing their share of the trustee’s tax.Because the offset is non-refundable, beneficiaries whose total tax liability is below the offset may lose part of it. This means the measure can adversely affect low-income beneficiaries, beneficiaries with carried-forward losses and families legitimately using trust distributions to support a spouse or adult family member with limited income.The proposal contains exclusions for certain trusts and income, including complying superannuation entities, special disability trusts, genuine testamentary trusts, primary production income and certain distributions to charitable or tax-exempt entities.

The Government’s new election option

In September, the Government introduced an alternative for discretionary trusts already in existence on 1 July 2028.Instead of restructuring, a trustee could elect to nominate beneficiaries and the fixed percentage of trust income and capital each beneficiary will receive. While the election remains effective, the trust would not be subject to the 30% minimum tax.At first glance, this may sound like a simple solution. In practice, it could have major long-term consequences.The nominated percentages must apply to both income and capital. If a company is nominated to receive a percentage of the trust’s income, it must also be allocated the same percentage of the trust’s capital.For a trust holding a business or appreciating assets, this could affect:

• future business-sale proceeds;
• access to the small business CGT concessions;
• succession planning;
• asset protection;
• estate planning; and
• the eventual distribution of trust capital.

The nomination generally cannot be varied except in limited circumstances involving the death of a nominated beneficiary or a qualifying relationship breakdown.The trustee can revoke the election, but it cannot then remake it. Once revoked, the trust becomes subject to the 30% minimum-tax regime in future years.If the trustee makes a distribution inconsistent with the nomination, the consequences are more severe. The election is automatically revoked, the beneficiaries are treated as never having been presently entitled for that year, and the trustee can be taxed on the trust’s entire net income at the highest marginal rate plus Medicare levy.The election and the proposed restructuring rollover are also alternatives, a trust cannot use both.

Restructuring is not necessarily cost-free

The Government is proposing three years of CGT and certain income-tax rollover relief from 1 July 2027 for qualifying restructures out of discretionary trusts. However, Commonwealth tax relief does not automatically eliminate:

• Victorian land transfer duty;
• costs of transferring property and business assets;
• lender and landlord consent requirements;
• legal and accounting costs;
• changes to contracts, licences and insurance;
• consequences for existing loans and unpaid present entitlements; or
• the possible loss of carried-forward tax and capital losses.

For some businesses, a restructure may ultimately be appropriate. For others, the duty and commercial costs could make it impractical.

But we need ACTION by you THIS WEEK!

You can help us help you, but we need your voice this week. These proposed changes mean even more complexity, red tape and cost for small businesses: more time spent obtaining advice, more work preparing tax returns and implementing new rules, and for the majority of you, more tax on top of already rising business costs and state taxes.

Ultimately, it is you, the business owner, who pays for this complexity. At a time when government should be empowering small businesses and improving productivity, these measures risk doing the opposite. The trust legislation released this week is currently open for comment, but only until 18 September, so please email your local Federal Member this week and tell them how these constant increases in red tape affect you, and also how your business is going in this current economy. Accountants around the country are rallying around to get their clients to contact their local MP's, please help us help you.

For Flinders, contact Zoe McKenzie at zoe.mckenzie.mp@aph.gov.au; for Dunkley, contact Jodie Belyea at jodie.belyea.mp@aph.gov.au. Our local MP's are there to let Canberra know how our community is going and the issues we face, so please speak loudly, if these proposals become law, many of our clients are likely to face additional tax, higher annual compliance costs and difficult restructuring decisions.