Treasury has now released its consultation paper on a proposed minimum 30% tax for discretionary trusts.
This is a significant development following the Budget announcements.
There is still a substantial amount of detail to be settled. Drafting of the final legislative provisions is still to be released. Transitional rules, exclusions, interactions with existing regimes and the proposed restructuring relief will all matter.
But the direction of travel is starting to show itself such that advisers and clients can begin to reflect on the consequences of the likely provisions.
This is unlikely to be confined to aggressive tax planning
The public framing focuses on income splitting to beneficiaries with lower marginal rates. That may be an understandable policy concern.
However, a broad minimum tax imposed at trustee level will not neatly distinguish between artificial income diversion and the ordinary uses of discretionary trusts in Australian family and business structures which are equally available to companies and partnerships.
It may affect:
- Family businesses distributing income between working family members.
- Investment trusts holding accumulated family wealth.
- Trusts holding commercial premises separately from an operating business.
- Families using trusts for succession, asset protection and flexibility.
- Beneficiaries temporarily on lower incomes because of illness, caring responsibilities, study or parental leave.
- Trust groups with losses, corporate beneficiaries or unpaid present entitlements.
The relevant question is not simply whether a taxpayer has engaged in “income splitting.”
It is whether they are connected with a discretionary trust — and, for a very large number of families, the answer will be yes.
The proposal may reach much further than its policy label suggests.
What is a discretionary trust?
The first difficult question may be the most fundamental: which trusts are actually within the regime?
The consultation process appears to contemplate a definition of “discretionary trust” that does not necessarily turn only on the label given to a trust deed.
That is understandable. Trust law is not always as tidy as the labels used in tax discussions.
But the issue raises real uncertainty.
The ATO has long recognised the conceptual difficulty in identifying whether beneficiaries have “fixed entitlements” to income or capital in a trust. In many cases, the existence of a fixed entitlement depends not merely on the terms of a deed, but on the operation of trustee powers, amendment powers, capital provisions, vesting arrangements and the practical ability of beneficiaries to enforce an interest.
The existing law frequently requires taxpayers to rely on the Commissioner’s discretion in this area.
If that approach is replicated or expanded for the minimum-tax regime, taxpayers may face a troubling position:
- A trust may not be clearly inside or outside the definition.
- The answer may depend on a discretionary administrative decision.
- The tax consequences may be substantial.
- Restructuring decisions may need to be made before certainty is available.
That is not an ideal foundation for a major new tax.
The question is not confined to the obvious discretionary family trust. It may arise for:
- Hybrid trusts with both fixed and discretionary features.
- Unit trusts with broad trustee powers or discretionary capital provisions.
- Trusts with default beneficiaries but wide powers of appointment.
- Family trusts with different income and capital beneficiary classes.
- Trusts amended repeatedly over many years.
- Trusts which were intended to be fixed but have drafting features that create doubt.
There may also be unexpected cases in which the proposed minimum tax becomes payable — for example:
- A trustee distributes business income to a lower-income adult beneficiary.
- A beneficiary is on parental leave, studying, ill or otherwise temporarily outside paid employment.
- A trust distributes income to a beneficiary with carried-forward losses.
- A trust distributes to an adult beneficiary with a disability who is outside the special disability trust regime.
- A trust distributes income to an exempt entity that cannot use a non-refundable offset.
- A trust makes a distribution to a corporate beneficiary.
- A trust distributes to another trust within the same family group.
Before debating rates and offsets, the legislation needs to identify its target trusts with clarity.
A tax that depends on the character of a trust should not leave taxpayers dependent on administrative discretion to know whether they are subject to it.
