Australia introduced dividend imputation to address economic double taxation.
Three very different recipients of trust income – a corporate beneficiary, a beneficiary with tax losses, and a charity – share the same underlying problem under the proposed minimum tax: the trustee pays 30% upfront, and the intended recipient ends up with less than they should, because the tax paid at the trustee level is never properly recognised at their end. Below, I look at each of these three cases in turn, and what they have in common.
Corporate beneficiaries and double tax
Broadly speaking, company profits are taxed in the company and then attributed to shareholders through franking credits when dividends are paid. The shareholder receives credit for the company tax already paid.
That system has operated for decades.
The proposed minimum tax on discretionary trusts risks bypassing it entirely.
If a trust distributes $100 of income to a corporate beneficiary, the trustee will first pay $30 of minimum tax. The company is then taxed on the full $100 distribution but receives no credit for the $30 already paid by the trustee.
The company can only frank dividends to the extent of tax it pays itself.
The result is that the trustee-level tax is not recognised anywhere in the company-tax and shareholder-tax chain.
On the worked example advanced in the consultation discussion, income ultimately reaching a top-rate shareholder through a corporate beneficiary can bear an effective tax rate of 69.71%.
That is extraordinary.
The top individual tax benchmark is 47%, including Medicare levy. Even tax regimes designed to impose a punitive outcome on highly undesirable arrangements generally operate by reference to that maximum rate.
It is difficult to see the policy basis for a 70% effective rate on income distributed through a corporate beneficiary particularly where the corporate beneficiary has an entirely commercial role.
Corporate beneficiaries are commonly used to:
- Retain profits for working capital and future investment.
- Smooth cash flow in seasonal or cyclical businesses.
- Fund acquisitions and business expansion.
- Provide asset-protection and risk-management flexibility.
- Manage distributions where family circumstances vary over time.
- Accumulate funds without requiring immediate personal extraction.
They are not inherently abusive. Nor are they an unusual feature of private groups.
If the trustee’s 30% tax is not made available in the imputation chain, the practical outcome may be clear:
Corporate beneficiaries become commercially untenable. It is difficult to understand why other than for political ideological reasons.
The same pattern — tax paid upfront by the trustee, with no way for it to be recognised further down the chain — reappears for family groups with genuine economic losses.
Losses may stop doing their job
The proposal may tax income even where the family group has genuine economic losses.
Loss recoupment is one of the areas needing much closer attention.
Today, a discretionary trust can distribute income to an individual beneficiary with carried-forward revenue or capital losses. Subject to the usual rules, those losses can reduce the beneficiary’s taxable income.
Likewise, within a family group, a profit-making trust may distribute income to another trust with losses. The income injection rules have long recognised that certain dealings within a defined family group do not involve the mischief those rules were intended to prevent.
The proposed minimum tax changes the order of events.
The trustee-level 30% tax applies before the distribution reaches the loss beneficiary. If the beneficiary has little or no tax liability after applying their losses, the offset may have no value.
The tax has already been paid. The tax effect of the loss is lost.
That is difficult to justify.
A tax loss reflects an economic cost that has already been borne. If a family group has suffered losses, taxing later trust income at a 30% floor before those losses can be used produces a result disconnected from the group’s real economic position.
The significant integrity rules about loss utilisation, including the making of irrevocable family trust elections under the existing law, effectively become redundant.
A reform aimed at low-rate beneficiaries should not casually dismantle settled loss outcomes within family groups.
A third case shows the same problem playing out for recipients who cannot use the offset at all – not because their own tax position happens to fall short of it, but because they are exempt from tax altogether.
Charities to be taxed
The proposed trust tax may reduce charitable giving particularly for organisations that cannot issue deductible gift receipts.
The discussion around the proposal has focused on family beneficiaries and business structures.
Less attention has been given to charities, churches, schools and community organisations that receive distributions from discretionary trusts.
Where a trust makes a gift to a deductible gift recipient, the tax treatment may be relatively straightforward because the trust can generally claim a deduction.
But many tax-exempt charitable and community bodies are not deductible gift recipients.
A discretionary trust may distribute income to those organisations because they are tax-exempt beneficiaries. Under the proposed minimum-tax regime, the trustee may pay 30% tax before the income reaches the charity.
The charity may receive a minimum tax offset – but, as a tax-exempt organisation, it cannot use it.
The practical result is simple:
For every $1 intended for the charitable recipient, only 70 cents may arrive.
This may affect organisations that rely heavily on community philanthropy and family support, including:
- Religious institutions and churches.
- Independent schools and education bodies.
- Local sporting associations.
- Community organisations.
- Welfare and support services.
- Other not-for-profit bodies that are tax-exempt but not DGRs.
The trustee pays tax. The recipient cannot use the offset. The charitable purpose receives less funding.
That is a strange outcome for a measure presented as an integrity reform directed at private income splitting.
There is an important policy distinction between a distribution to a lower-rate individual and a distribution intended to fund a tax-exempt community purpose.
A minimum tax should not unintentionally turn charitable distributions into a 30% haircut on community giving.
The pattern, side by side
Three very different recipients – a company, a beneficiary with losses, and a charity – all end up worse off under the same mechanism: the trustee pays 30% before the money arrives, and the recipient has no way to recover it.
Recipient | What happens | Practical outcome |
Corporate beneficiary | Trustee pays 30% tax; the company receives no credit for it and can only frank to the extent of tax it pays itself | Income can bear an effective tax rate of 69.71% by the time it reaches a top-rate shareholder |
Beneficiary with tax losses | Trustee-level tax applies before the distribution reaches the beneficiary; the losses can’t be used to reduce a liability that’s already been paid | The tax effect of the loss is lost entirely |
Tax-exempt charity | Trustee pays 30% tax; the charity receives an offset it cannot use, being tax-exempt | Only 70 cents in every intended dollar may arrive |
Key takeaways:
- The minimum tax is paid by the trustee before the money reaches its intended recipient, and in each of these three cases, that tax can’t be properly recovered further down the chain.
- For corporate beneficiaries, the lack of a credit in the imputation chain can produce an effective tax rate as high as 69.71%, well above the top individual rate of 47%.
- For beneficiaries with genuine tax losses, the offset may have no value at all, because the tax is paid before the losses can do their job.
- For tax-exempt charities, the offset can never be used, meaning only around 70 cents in the dollar may reach the intended charitable purpose.
- None of these recipients are inherently part of an aggressive tax-planning problem – they are ordinary features of family businesses, family groups with genuine losses, and charitable giving.
