30 per cent minimum tax on discretionary trusts
30 per cent minimum tax on discretionary trusts
The Government will introduce a 30% minimum tax on the taxable income of discretionary trusts from 1 July 2028. This measure aims to improve the fairness of the tax system and help fund new tax cuts for workers. Trustees of discretionary trusts will be required to pay this minimum tax, and beneficiaries, excluding corporate beneficiaries, will receive non-refundable credits for the tax paid by the Trustee.
The minimum tax will not apply to other types of trusts, including fixed and widely held trusts (such as fixed testamentary trusts), complying superannuation funds, special disability trusts, deceased estates, and charitable trusts.
Certain types of income will also be excluded, including:
- Primary production income
- Income related to vulnerable minors
- Amounts subject to non-resident withholding tax
- Income from assets of discretionary testamentary trusts existing at the time of announcement.
The measure is expected to increase government receipts by $4.5 billion over the five years from 2025–26. The ATO will receive $660 million over the same period to support implementation, with funding from 2027–28 to be held in the Contingency Reserve.
Expanded rollover relief
To support small businesses and others seeking to restructure out of discretionary trusts, the Government will provide expanded rollover relief for three years starting 1 July 2027. This relief will facilitate transitions into other entity types, such as companies or fixed trusts.
BDO comment
We expect that this measure will be complex to introduce. We hope that when introduced, the proposed measure complies with the principles of good tax design - efficiency, equity, and simplicity.
Under the proposed measure, the Trustee of a discretionary trust estate with net distributable income for taxation purposes of $15,000 will be subject to a 30% tax. In contrast, an individual deriving the same taxable income would fall below the tax-free threshold and incur no income tax liability. It appears that the days of treating trusts as flow-through vehicles for tax purposes are over.
We assume that franking credits attached to franked income included in the trust’s assessable income will reduce the tax payable by the Trustee, but this needs clarification. This is likely to make what are now refundable franking credits non-refundable when received via a discretionary trust distribution.
While the proposed three-year rollover relief provides some transitional support from an income tax perspective, its effectiveness will depend on complementary relief at the State and Territory level, particularly in relation to Duty. Taxpayers may face material transactional costs that inhibit efficient restructuring if relief is not coordinated at the Federal, State, and Territory levels.
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