Federal Budget Changes to the Taxation of Trusts
What does this mean for existing structures and succession plans?
Facts
- From 1 July 2028, trustees of discretionary trusts will be taxed at a minimum rate of 30% on the taxable income of the discretionary trust.
- Beneficiaries other than corporate beneficiaries will receive non-refundable credits for the tax paid by the trustee.
- The minimum tax only applies to discretionary trusts – not other trusts such as complying superannuation funds and fixed unit trusts. Importantly, the minimum tax does not apply to testamentary trusts established in Wills (subject to “some integrity measures” yet to be determined).
- Rollover relief will be available for three years from 1 July 2027 to support small businesses and others that wish to restructure out of discretionary trusts into another entity type, such as a company or a fixed trust.
Our Thoughts
- We must await final legislation to clarify finer details of the proposed changes before taking any action.
- The impact of the changes has been exaggerated by some commentators. Where a trust is distributing to non-corporate beneficiaries with a tax rate of 30% or higher (i.e. incomes above $45,000), there will generally be no overall increase in tax paid. However, if distributions are made to beneficiaries on lower incomes with a tax rate of less than 30% (e.g. adult students), the new measures will result in additional tax payable.
- The practice of distributing income to a “dump company” to limit the immediate tax rate to the company rate of 30% (or 25% for eligible entities) is finished. A beneficiary company will not receive a credit for tax paid by the trustee.
- The use of testamentary trusts in Wills continues to be a most effective tax and asset protection mechanism. We await final details from the Government of the required “integrity measures”- e.g. whether the concessional treatment of testamentary trusts will only be available where the trust benefits individuals and income tax exempt entities (not companies).
- When the legislation is finalised, you should review your current structures to determine whether consideration should be given to utilising the rollover provisions to restructure out of a discretionary trust into a company or a fixed trust. When undertaking that review, the following considerations will be relevant:
i) Discretionary trusts continue to offer significant benefits, including:
• asset protection and long-term wealth protection
• succession planning flexibility
• wide discretion for income distributions
• availability of indexation of capital gains, thus reducing CGT payable
However, it is not possible to tax-effectively retain profits in a discretionary trust and postpone payment of top up tax.
ii) Companies – advantages of companies include:
• the tax rate is 25% for eligible small companies
• companies are able to retain profits which can be applied for workingcapital purposes
• the ability to distribute dividends to shareholders with fully refundable franking credits
However, companies cannot utilise indexation to reduce the CGT payable.
iii) CGT and Stamp Duty
Any restructure may result in significant capital gains tax and State stamp duty costs. The extent to which the three-year rollover relief minimises these costs depends on the final terms of such relief.
iv) Existing “fixed” unit trusts will need to be reviewed to ensure that the terms of the trust deed meet all legislative requirements to achieve fixed trust status.
Conclusion
- The Budget changes raise a number of questions concerning the most appropriate …business and investment structures going forward. Once the final details of the …proposed changes are known, we will provide an update at which time your current …structures should be carefully reviewed by us in association with your …accounting/taxation advisers.
Please do not hesitate to contact us for further information or specific advice: cjr@riordanriordan.com.au | 03 9864 8444