Minimum Tax on Discretionary Trusts: What the Draft Law Actually Changes

The headlines after 3 September said the Treasurer had dropped the trust tax. He had not. The 30 per cent minimum tax on discretionary trusts is still coming, it still starts on 1 July 2028, and the draft legislation released that day keeps the May Budget design. What it added is a way to stay out of the tax without moving a single asset.

That changes the advice we gave on Budget night. In our Budget summary we said anyone running a business through a trust should book a restructure meeting. There are now three paths, and for about half of all discretionary trusts the right one is to do nothing.

Prefer to listen? We covered this in The Trust Tax Wasn't Dropped: What the Draft Law Actually Says, episode 58 of the Aevum Accounting Podcast.

What the draft law actually does

Today each beneficiary pays at their own rate on whatever share the trustee gives them. From the income year that includes 1 July 2028, the trustee pays tax up front, topped up so that at least 30 per cent has been paid on the trust's net income, less a few excluded categories. Beneficiaries still declare their share and receive a credit for the tax the trustee paid.

That credit is not refundable. Anyone already on 30 per cent or more, roughly any taxable income above $45,000, ends up about where they are today. Anyone on a lower rate loses the difference. On Treasury's example, a $200,000 investment trust split four ways between family members with no other income pays about $24,000 today, an average rate of 12 per cent. A salary earner on the same $200,000 pays just over $59,000, and the minimum tax closes most of that gap.

The bucket company problem

A company set up as a beneficiary gets no credit at all. Trust profit sent to a bucket company is taxed at 30 per cent in the trust and taxed again in the company, so around $60 of every $100 is gone before a dividend is paid. Treasury's reason is that companies already use the corporate rate and franking credits to defer tax for shareholders, and a credit on top would let the minimum tax be sidestepped.

Franking credits on dividends the trust receives must now be used by the trustee to pay the minimum tax, so a low-rate beneficiary who used to have them refunded loses them. And the government will separately legislate the 2018 Budget measure on unpaid present entitlements, so the door the High Court's Bendel decision opened in June is closing.

Who is outside it

Super funds, fixed trusts, special disability trusts, deceased estates and charities are out. Some kinds of income are excluded whatever trust earns them: primary production income, income for vulnerable minors, distributions to registered charities and deductible gift recipients, and the income of a genuine testamentary trust from the estate's assets. The exclusion attaches to the income, not the trust, so a farming trust that also earns rent has the rent inside the tax.

Property injected into a testamentary trust after Budget night that is unrelated to the estate is caught, and a testamentary trust set up on or after 1 July 2028 loses the exclusion if a company is among its beneficiaries. Wages to family members who genuinely work in the business are outside it entirely.

Path one: do nothing

If everyone your trust distributes to is already on 30 per cent or more and there is no bucket company, the minimum tax costs you close to nothing beyond extra paperwork. Treasury expects around half of discretionary trusts not to be affected in any given year.

Path two: the election

This is the new part, and the reason the headlines said the tax was dropped. A trust that exists on 1 July 2028 can elect, in the 2028-29 year only, to nominate its beneficiaries and give each a fixed percentage of income and capital adding up to 100 per cent. It becomes what the draft calls an excluded election trust: no minimum tax while the election is in force, nothing transferred, and it stays a discretionary trust for every other purpose rather than becoming a fixed trust. Because nothing moves, the Treasurer says the election is not expected to attract state stamp duty, though that is Canberra's expectation rather than a ruling from any state revenue office.

The price is rigidity. Every nominee must already be able to benefit under the deed in force on 1 July 2028, so the deed needs reading now. The percentages can only change if a nominee dies, and then only that person's share, or two nominees go through a relationship breakdown. Break the nomination, or let a nominated company be wound up, deregistered or change hands, and the election is revoked for good: the trustee pays 47 per cent on the whole of that year's net income, and the minimum tax applies from the next year. A bucket company can be nominated if it existed on 1 July 2028, is in the deed and has no material discretionary elements in its share structure.

Path three: restructure

From 1 July 2027 to 30 June 2030 a discretionary trust of any size, business or passive, can move its assets to a single new entity without capital gains tax on the transfer. All the assets must go, apart from a short list such as assets kept back to pay the trust's debts, the same family must own the new entity, and a company cannot have material discretionary elements, which in practice means one class of ordinary shares. Introduce discretion within four years and the ATO can reverse the relief.

There is no stamp duty relief. On a trust holding land or business assets the duty bill can dwarf the tax being avoided. Restructuring suits a trust whose assets attract little duty and whose owners want the 25 per cent small business company rate. On Treasury's Budget example, a $300,000 business run through a company pays $72,002 against $86,002 through a trust under the minimum tax. A trust cannot both elect and restructure.

Four things to do this month

Model it: put last year's distributions in front of your accountant and work out what the minimum tax would have cost. Read the deed, because nominees must be in it and a restructure needs the power to move everything out. Get the stamp duty number for a restructure if the trust holds land or business assets, since that figure usually decides the question. And if you have a bucket company, check what it is owed and what has actually been paid.

Do not restructure on a draft. The rollover window does not open until July next year and the law is not final. Model now, decide when it is law.

If you would like your trust modelled under all three paths, book a consultation with our team. Our small business accountants in Perth do this work every week, and if you are already a client you will hear from us the moment this becomes law.

The information in this article is general in nature and does not take into account your personal circumstances. It does not constitute specific tax or financial advice. Everyone's situation is different, so we recommend speaking with a qualified professional at Aevum Accounting before acting on anything you have read here.