The Trust Tax Wasn't Dropped: What the Draft Law Actually Says

Mia: Welcome to the podcast, our newsletter made easy. Please note, this podcast features AI-generated voices for your hosts, Mia Taylor Leo: and Leo Baker, bringing you expert insights from the team at Aevum Accounting. Each week, we're here to help you confidently navigate the ins and outs of Australian tax, whether it's for your individual finances or the complexities of your business. Mia: We'll cut through the jargon to give you strategies for compliance, smart planning, and that ultimate peace of mind. Leo: So, if you're looking to understand your obligations, maximise your financial position, or simply gain clarity on your money matters, you're in the right place. Let's get started with our review of the week! Mia: This one comes from James. He says he couldn't recommend the team enough, that they're always easy to get hold of, and that they explain everything in a way that actually makes sense. Maddy in particular helped him get his business structure sorted properly. Leo: Thank you, James. And structure is today's subject, because the biggest structural question in Australian tax got a lot clearer on the 3rd of September, and a lot of the headlines about it were wrong. Mia: You're talking about the trust tax. Leo: The thirty per cent minimum tax on discretionary trusts. If you read the coverage the day after the draft law came out, you may have seen that the Treasurer dropped it. Mia: I did see that. Leo: He didn't. The tax is still coming, and it still starts on the 1st of July, 2028. What actually happened on the 3rd of September is that the draft legislation came out, and it includes a new way to stay out of the tax without restructuring. Some columnists called that a backdown. It isn't one. Mia: So the headline was wrong, and the detail is the story. Leo: Exactly, and that's why Harvey's back. Harvey, welcome. Harvey: Thanks. And I should own something. On Budget night, in Episode 41, I told everyone with a business in a trust to book a restructure meeting. Four months on, that advice needs updating, because there's now a third option that didn't exist in May. Mia: Before the options. Is it law? Harvey: No. Announced in the May Budget, consultation paper in July, and the draft legislation on the 3rd of September, with a two-week consultation window to the 18th. The government says the administrative rules will follow in later bills. Leo: It's the last of the big Budget measures still to pass. Harvey: It is. The capital gains and negative gearing changes went through in June with the Greens' support. So this is a draft, but it's a draft with the numbers behind it, and the start date hasn't moved. Mia: Alright. Give me the mechanics as if I've never heard of it. Harvey: Today, a discretionary trust pays no tax itself. The trustee decides each year who gets the income, and each of those people pays at their own rate. High-rate family member, low-rate family member, you send it to the low one. That's the whole appeal. Mia: And from July 2028? Harvey: From the 1st of July, 2028, the trustee pays tax up front, topped up so that at least thirty per cent has been paid on the trust's net income, less a few excluded categories we'll come to, before it goes anywhere. The beneficiaries still declare their share exactly as now, and they get a credit for the tax the trustee already paid. Leo: So for a lot of people, nothing changes. Harvey: For a lot of people, very little. If you're already on thirty per cent or more, which is roughly anyone with taxable income above forty-five thousand dollars, the credit covers what the trust paid and you top up the rest as normal. Mia: Then who pays more? Harvey: The person the trust was streaming income to because they were on a low rate. A student, a non-working spouse, a retired parent. The trust has paid thirty per cent on their share, when their own rate might have been fourteen per cent, or nothing at all. And the credit is non-refundable. Mia: Meaning? Harvey: It can only reduce tax. It can't come back as a refund, can't be carried forward, and can't be used against the Medicare levy. Whatever the trustee paid above what that person would have owed is simply gone. Leo: That's the whole design. Harvey: That's the whole design. Income earned through a trust ends up taxed at no less than thirty per cent, which is the rate a wage earner pays on every dollar between forty-five thousand and a hundred and thirty-five thousand dollars. Mia: Let's put a family on it. Not a business, just an investment trust. Harvey: Treasury's own example. A family trust earns two hundred thousand dollars of investment income, and the trustee splits it four ways, fifty thousand each, to himself and three family members with no other income. Total tax across the family, about twenty-four thousand. An average rate of twelve per cent. Leo: And if that same two hundred thousand was a salary? Harvey: Just over fifty-nine thousand. Under the minimum tax, the trust pays thirty per cent on the two hundred thousand however it's split, so the family lands roughly where the salary earner does. Mia: That's a thirty-five thousand dollar difference. Harvey: That's the gap Treasury is closing. Their figure is that families with a discretionary trust paid an average rate about four percentage points lower than similar families without one. The whole policy rests on that number. Mia: Okay. Now the business side, because that's where most of our listeners are. Harvey: Then we talk about bucket companies. Mia: Remind me what a bucket company is. Harvey: A company set up as a beneficiary. Instead of sending profit to a family member on a high rate, the trust sends it to the company, which pays twenty-five or thirty, and the cash sits there until it's needed. Standard move for a profitable trust for twenty years. Leo: On Budget night you said this kills it. Harvey: And by default, it still does. A company beneficiary gets no credit for the tax the trustee paid. None. So a hundred dollars of trust profit loses thirty at the trust, and the company is taxed on its full share again. Sixty dollars gone before a single dividend is paid. Mia: Sixty per cent. Harvey: At that point, and more once the dividend reaches a shareholder. Treasury did that deliberately. Its stated reason is that companies already have the corporate rate and franking credits to defer tax for their shareholders, so if the company got the credit as well, the minimum tax could be sidestepped just by routing income through a bucket company. Mia: While we're on bucket companies, there was a court case in June. Harvey: Bendel. The High Court decided that when a trust owes a distribution to a bucket company and hasn't actually paid it over, that unpaid amount is not a loan under Division seven A. That overturned how the tax office had treated it since 2009. Leo: Which sounds like a win. Harvey: It was. But alongside the draft law, the government said it will separately legislate the 2018 Budget measure on unpaid entitlements, so that door is closing. If your trust has years of unpaid entitlements sitting with a company, that needs attention regardless. Mia: Who's carved out entirely? Harvey: Whole trust types first. Super funds, fixed trusts, special disability trusts, deceased estates and charitable trusts. Then some kinds of income, whatever trust earns them. Primary production income. Income for vulnerable minors. And anything paid to a registered charity or to deductible gift recipients. Mia: So a farming trust is out? Harvey: The farm income is out. It's the income that's excluded, not the trust, so if that same trust also earns rent or interest, that part is still in. Worth knowing if the family has diversified. Leo: What about testamentary trusts? We covered those in Episode 46. Harvey: Genuine ones are excluded, and it's more generous than the headlines suggested. Income from the estate's assets is out, and so is income from a replacement asset if the trust sells one and buys another at arm's length. What's caught is property injected after Budget night that has nothing to do with the estate. Special disability trusts are out cleanly, so everything we said in Episode 46 still stands. Mia: One more. If I work in my family's business and I'm paid a wage, not a distribution? Harvey: Nothing changes. Wages aren't distributions, and Treasury put that in the Budget papers as a suggestion. If a family member does real work in the business, pay them a real wage for it, and that part sits outside the minimum tax completely. Leo: Right. Harvey, the three options. Harvey: Do nothing, elect, or restructure. In that order, because the first one is more common than people think. Mia: Start with doing nothing. Harvey: If everyone your trust distributes to is already on thirty per cent or more, and there's no bucket company, it costs you close to nothing. More paperwork, because the trustee now pays and reports, but about the same total tax. Treasury reckons roughly half of all discretionary trusts won't pay more in any given year. Leo: That's a lot of people who can stop worrying. Harvey: Once they've done the sum. Not before. Mia: Second path. The new one. Harvey: The election. This is what the draft law added, and it's why the headlines said the tax was dropped. A trust that exists on the 1st of July, 2028 can elect to fix its distributions. The trustee nominates the beneficiaries and gives each a fixed percentage, adding up to a hundred, for income and capital alike. Mia: And then? Harvey: Then the trust becomes what the draft calls an excluded election trust. While the election is in force it isn't a minimum tax trust, so no minimum tax, but it isn't turned into a fixed trust either. It stays a discretionary trust for everything else. Each beneficiary is taxed on their percentage at their own rate, same as today, and the trust keeps its name, its bank accounts, its contracts and its assets. Nothing is transferred. Leo: Which is the stamp duty point. Harvey: Which is the entire reason it exists. Moving assets into a company is a transfer, and the states charge duty on transfers. Land especially. Canberra can't waive state duty, and when the idea was floated in July the state treasurers were somewhere between reluctant and hostile. So this is the workaround. No transfer, no duty. At least in Treasury's view. Mia: In Treasury's view? Harvey: Some lawyers think certain states will still find a way to charge it. Not settled. But the intent is clear. Mia: And can a bucket company be one of the nominated beneficiaries? Harvey: It can, and that's the part I'd flag for business owners. There's no minimum tax on an elected trust, so there's no double tax on the company either. The company has to already exist and be a beneficiary under the deed on the 1st of July, 2028, with no material discretionary elements affecting the shareholders' rights. In practice that means one class of ordinary shares, but the test is the discretion, not the share class. But the bucket company isn't dead. It's locked in at a fixed percentage instead of at your discretion. Leo: What's the catch? There's obviously a catch. Harvey: Two. The first is rigidity. Once you've nominated, you can only change the percentages if a nominated beneficiary dies, and then only that person's share, or two of them separate. That's the whole list. If one moves overseas, loses capacity, or goes broke, you can't adjust. Mia: So you're giving up the D in discretionary. Harvey: Completely. You keep the trust and give up the discretion. Mia: And the second catch? Harvey: The penalty for breaking it. Distribute in a way that doesn't match the nomination, or let a nominated company be deregistered or change shareholders, and the election is revoked automatically and can never be made again. For that year the beneficiaries are treated as never having been entitled, and the trustee is taxed on the whole of the trust's income at the top marginal rate plus Medicare. Leo: That's forty-seven per cent on everything. Harvey: On everything, for that year, and thirty per cent every year after. It's the harshest integrity rule I've seen in this area. You would not want a bookkeeping error to trigger it. Mia: Is there anything to do before the election is even available? Harvey: Yes. Every person or company you nominate has to already be a beneficiary under your deed on the 1st of July, 2028. So the deed comes out of the drawer and gets read. If someone you'd want isn't in it, the deed has to be amended before then. Mia: Third path. Restructure. Harvey: What I told people to book a meeting about in May, and it's still real. From the 1st of July, 2027 there's a three-year window, closing on the 30th of June, 2030, to move everything out of the trust without capital gains tax on the transfer. Usually into a company or a fixed trust. Leo: And this is broader than we said on Budget night. Harvey: It is, and I'll correct myself. In May I described it as relief for small businesses. The July paper opened it to any discretionary trust of any size, including a passive investment trust that doesn't run a business. Mia: What are the conditions? Harvey: All the assets go, apart from a short list like assets kept back to pay the trust's debts and anything that cost a thousand dollars or less, to a single new entity, and the same family has to own it afterwards. If it's a company, no material discretionary elements, which in practice means one class of ordinary shares. And there's a four-year clawback. Introduce any discretion into the new entity in that time, alphabet shares for instance, and the tax office can reverse the relief. Leo: And stamp duty? Harvey: No relief. The rollover covers federal tax only. If your trust holds land, a factory, a rental portfolio, or in some states business assets, restructuring means duty on the transfer. On a land-rich trust that bill can dwarf the tax you were trying to avoid, and it's exactly why the election was invented. Mia: So who restructures rather than elects? Harvey: Someone whose assets don't attract much duty, and who wants what a company gives you. The twenty-five per cent rate if you're a small business, and profit you can keep in there to grow it. Treasury's own worked example has the company ahead of the trust by fourteen thousand dollars, which tells you where they think this lands. Mia: Can you elect and restructure both? Harvey: No. One or the other. And two things about timing. The election is only open to trusts that already exist on the 1st of July, 2028, so setting one up after that date isn't a way in. And it has to be made in that first year, 2028 to 29. Miss that window and it's gone for good. Mia: Practical close, then. If someone has a trust, what do they do this month? Harvey: Four things. First, find out which of the three you are. Put last year's distributions in front of your accountant and model what the minimum tax would have cost. For about half of you the answer is close to nothing, and that ends the conversation. Leo: Second? Harvey: Get the deed out. For the election, the nominees have to be in it. For a restructure, the trustee needs the power to move everything out. Deeds written twenty years ago often don't do what people assume. Mia: And the third? Harvey: If the trust holds land or business assets, get the stamp duty number for a restructure. That single figure usually decides election versus restructure on its own. Leo: And fourth? Harvey: If you have a bucket company, look at what it's owed and what's actually been paid over. Between Bendel and this, the unpaid entitlement position needs to be clean before 2028. Mia: And is there anything people should not do? Harvey: Don't restructure on a draft. The window doesn't open until July next year, the law isn't final, and a restructure that turns out to be unnecessary is an expensive way to find that out. Model now, decide when it's law. Mia: Harvey, thank you. Harvey: My pleasure. And one thing I want to be clear about. If you're already a client of Aevum Accounting, you don't need to chase this. If and when it becomes law, the team will be contacting every client with a trust to book a meeting and go through the options properly. Mia: So let's recap. The trust tax was not dropped. Thirty per cent at the trustee level from the 1st of July, 2028. Leo: Beneficiaries get a credit for what the trustee paid, but it's non-refundable, so anyone on a low rate loses the difference. And bucket companies get no credit at all. Mia: Three paths. Do nothing, if everyone's already on thirty per cent or more and there's no bucket company. Elect fixed percentages and stay out of it, with no flexibility and a brutal penalty for breaking it. Or restructure before the 30th of June, 2030, with no stamp duty relief. Leo: Super funds, fixed trusts, special disability trusts and deceased estates are out. So is farm income, anything paid to a charity, and wages to family working in the business. Mia: And the list. Model it, read the deed, get the stamp duty number, and clean up the bucket company. Leo: The consultation window on the draft ends on the 18th of September, and the administrative rules are still to come in a later bill. Mia: If you're not a client yet and you'd like the team to model your trust under all three paths, head to A-vum accounting dot com dot a u and book a session. Leo: Or head to Aevum Accounting at aevumaccounting.com.au. And if you're already a client, you'll hear from us the moment this becomes law. Mia: Before we go, a quick but important reminder. The information shared today is for general informational purposes only, and does not constitute specific tax or financial advice. Leo: Everyone's situation is unique, and tax laws are complex. For personalised advice tailored to your situation, we always recommend consulting with a qualified professional. Mia: Until next time, stay savvy, stay proactive... Harvey: And get that trust deed out of the drawer!