From 1 July 2028 changes to apply to – Discretionary trusts
The introduction of a 30% minimum tax rate on the taxable income of discretionary trusts would represent a fundamental change to the way the tax system operates at the moment ☹
HOW – The Government is indicating that the
- 30% tax would initially be paid by the trustee,
- with beneficiaries (other than companies) receiving a non-refundable tax credit for the tax paid at the trust level
What does this mean?
- It means that where the beneficiary has low taxable income .. where the
> 30% credit from the trust is more than the tax payable on the total income… then
> No refund is given for the balance
WHY – This measure is aimed at
- curbing income splitting
- to lower-taxed family members and
- corporate beneficiaries (often known as bucket companies).
Exemptions would apply, including for
- fixed and widely held trusts,
- superannuation funds,
- special disability trusts,
- deceased estates,
- charitable trusts,
- primary production income and some other specific trust types.
While the Government has indicated that existing discretionary testamentary trusts would be exempt from these changes, concerns have been raised about the application of the changes to testamentary trusts that come into existence after Budget night. However, reports in the media suggest that the Government is open to reconsidering this aspect of the changes, but we will have to wait and see how this plays out.
SOME RELIEF – TIMING – To assist with transitions,
- three years of roll-over relief will be available for restructures into companies or fixed trusts.
Example (adapted from budget materials)
Kurt operates his business through a discretionary trust and makes a profit of $300,000.
Kurt pays himself a salary of $100,000 and distributes the remaining $200,000 to four family members who have no other income.
In total, Kurt and his family members pay around $42,000 in tax on this income.
- If the 30% minimum tax rate rules are introduced then Kurt and his family members would pay around $86,000 in tax on this income.
- This is a significant increase in the total amount of tax paid on the same level of profit.
Comment – For discretionary trusts with residential rental properties
- Where the rental income is at the same level as above example, then the same outcome is likely
- Where rental income is different or there a rental loss the a different plan may be required on review
In situations like the business example above there might be scope to restructure the business into a company to potentially access a lower 25% tax rate or pay salary / wages to some family members who are genuinely working in the business.
For property owning trusts – wait for more info as it becomes available
Practical issues
Many business and investment structures will face higher effective tax rates under the proposed changes, although the Government is planning to undertake a consultation process to refine the rules.
- It is possible that the final version of the rules will look a bit different to the proposals announced in the Budget.
While the start date for this measure isn’t until 1 July 2028,
- now is the time to start modelling scenarios and comparing the pros and cons of other options.
In some cases the overall impact of the changes might be minimal and
- no material changes will be required.
In some cases it might still make sense
- to continue utilising discretionary trust structures,
- but with some alternative distribution strategies in place.
In other cases it will make sense
- to explore whether a restructure might provide better long-term outcomes.
What to do next
The proposed reforms are significant, but the practical impact will depend on your situation. While we are still waiting to see how this all plays out, if you have concerns in the meantime feel free to contact us. We can review your situation, run tailored projections and help you make informed decisions. We will also keep you up to date as further details emerge and legislation progresses.
