The proposed tax may place trustees in direct tension with their fiduciary duties.
Two separate problems point to the same conclusion: this is not the moment for trustees or advisers to act quickly. The first is a genuine legal dilemma trustees face right now, in funding a tax that hasn’t even been finalised. The second is a caution against restructuring in response to a rollover whose terms – and whose interaction with state and territory duty – aren’t yet settled either. Below, I look at both.
The trustee’s impossible choice
The legislation may nominate the trustee as the person liable for the minimum tax.
But that does not answer the practical and legal question: where does the trustee obtain the money to pay it?
The trustee may need to fund the liability from:
- Current income otherwise payable to income beneficiaries
- Trust capital
- Borrowings
- Retained assets
- Contributions or indemnities from particular beneficiaries
Each option may produce a different outcome for different beneficiaries.
That becomes especially difficult where a trust has separate classes of income and capital beneficiaries.
For example, a trust may have:
- One class entitled to annual income
- Another class expected to benefit from capital growth.
- A life tenant entitled to income for life
- Remainder beneficiaries entitled to capital after the life interest ends
- Different branches of a family intended to benefit from different pools of trust assets
If the tax is funded from income, the trustee may reduce amounts that income beneficiaries expected to receive or to which they may already be entitled.
If it is funded from capital, the trustee may diminish the interests of capital beneficiaries – including people who did not receive income in the relevant year.
In a life-interest arrangement, the consequences may be particularly acute. A trustee paying tax from capital may prejudice the remainder beneficiaries. Paying from income may prejudice the life tenant.
Neither result is automatically authorised merely because the tax law says the trustee is liable.
Trustees will need to consider:
- Whether the deed authorises retention of income for tax
- Whether tax can be allocated to income, capital or both
- Whether a beneficiary indemnity is available and enforceable
- Whether the trustee can apportion the cost between beneficiary classes
- Whether the trustee must obtain advice, directions or beneficiary consent
- Whether a decision creates litigation risk from a disadvantaged beneficiary class
This is not simply a compliance issue. It is a major trustee-duty issue.
A detailed review of each trust deed will be essential well before the proposed commencement date.
The trustee’s funding dilemma is a problem that exists today, even before the final rules are settled. The same caution – do not act before the picture is clear – applies just as strongly to the question of whether, and when, to restructure.
Do not restructure yet
The response now should be careful preparation – not immediate restructuring.
The proposed rollover may eventually provide an avenue for some trusts to move assets or business activities into another structure without immediate CGT and certain income-tax consequences.
That is welcome in principle.
But it is not yet a practical answer.
The final minimum-tax rules are not known. The definition of affected trusts, exclusions, offset mechanics, corporate beneficiary treatment, treatment of losses, trust-to-trust distributions and interactions with Division 7A all remain subject to further development.
The rollover itself also requires final legislative detail.
Most importantly, Commonwealth tax relief does not solve State and Territory transfer duty.
For many family groups, duty may be the largest cost of any restructure. A transfer of business real property, investment property or business assets may be affordable in one jurisdiction and prohibitive in another.
Until States and Territories indicate whether they will provide corresponding duty relief, advisers cannot sensibly present a Commonwealth rollover as a cost-free exit.
The practical work involved in any restructure must also be recognised. Transferring a business or asset-holding structure can require lender approval, landlord consent, contract assignments, asset transfers, employee arrangements, insurance changes, regulatory notifications and new financing documentation.
A limited rollover period does not make those matters disappear.
For now, the appropriate position is measured:
- Do not assume the current consultation design will become law unchanged.
- Do not undertake a major restructure merely because a rollover has been proposed.
- Do not overlook duty, commercial consents and trust-law consequences.
- Do not leave clients unaware that their existing arrangements may need review.
And for advisers, there is unlikely to be one restructure outcome relevant for all clients. The individual client motives and priorities will mean that clients with the same current structures may end up undertaking different restructures.
The task now is to understand exposure, understand client priorities, preserve flexibility and wait for rules capable of being implemented with confidence.
Two problems, one message
Issue | Why it isn’t straightforward yet | What to do now |
Funding the trustee-level tax | Different funding sources (income, capital, borrowings, beneficiary contributions) prejudice different beneficiaries; deeds may not clearly authorise or allocate the cost | Review each trust deed now to understand what it does and doesn’t authorise, well before the proposed commencement date |
Restructuring via the proposed rollover | Final minimum-tax rules, exclusions, offset mechanics and Division 7A interactions are still unsettled; State and Territory duty relief hasn’t been confirmed | Preserve flexibility, prepare exposure analysis and client priorities, and wait for rules that can be implemented with confidence |
Where this leaves family groups and their advisers
Across this series, the same pattern keeps emerging in different forms.
The proposal was framed around income splitting, but its reach may extend to family businesses, investment trusts, and beneficiaries who are simply on lower incomes for ordinary reasons – illness, caring responsibilities, study or parental leave. Which trusts are actually caught may itself depend on an uncertain definition, one that could leave taxpayers dependent on administrative discretion rather than clear rules.
Where the proposal does apply, the non-refundable offset means a “30% tax” is often not a 30% tax at all – vulnerable beneficiaries, middle-income earners, and even family businesses distributing income near the top marginal bracket can all lose part of the offset simply because their average tax rate falls short of 30%.
The same underlying mechanism, tax paid upfront by the trustee, with no way to recover it further down the chain, also affects corporate beneficiaries, family groups with genuine tax losses, and charities that cannot use a non-refundable offset at all.
And for trustees and advisers, the practical questions don’t stop at who pays more tax. Trustees face a genuine dilemma over how to fund the tax without prejudicing one class of beneficiary over another, and the proposed rollover relief is not yet a reason to restructure, given how much of the detail, including State and Territory duty treatment, remains unresolved.
The consistent theme throughout this series has been one of caution rather than alarm: the direction of travel is clear enough to start considering the consequences, but the final rules, exclusions and transitional provisions are not yet settled. The task for now is to understand exposure, preserve flexibility, and prepare – not to assume the current proposal will become law unchanged, and not to act before the rules are capable of being implemented with confidence.
Key takeaways
- Trustees face a genuine, current dilemma over how to fund the proposed tax – every funding option (income, capital, borrowings, beneficiary contributions) can prejudice a different class of beneficiary.
- This is not simply a compliance question, it is a major trustee-duty issue that calls for a detailed review of each trust deed now, before commencement.
- The proposed CGT rollover is welcome in principle, but the final rules aren’t yet known, and Commonwealth relief alone doesn’t address State and Territory transfer duty.
- Restructuring purely because a rollover has been proposed risks overlooking duty, commercial consents and trust-law consequences that don’t disappear just because a limited rollover period exists.
- There is unlikely to be one right answer for every client, the task now is to understand exposure and preserve flexibility, not to act before the rules are settled.
- Across the series as a whole: the proposal may reach well beyond aggressive tax planning, the non-refundable offset means “30%” is often not really 30%, and the same tax-paid-upfront problem affects corporate beneficiaries, loss beneficiaries and charities alike – all reasons to prepare carefully now, rather than react once the rules are settled.
