30% MINIMUM TAX ON DISCRETIONARY TRUST INCOME
From 1 July 2028 trustees of discretionary trust will be required to pay a minimum tax of 30% on the trust’s taxable income.
The minimum tax only applies to discretionary trusts, and not to fixed trusts, widely held trusts, special disability trusts, deceased estates, charitable trusts, or complying superannuation funds.
The minimum tax will not apply to primary production income, certain income relating to vulnerable minors, amounts already subject to non-resident withholding tax, and income from assets of testamentary trusts existing at announcement date.
The trustee will be liable to pay the minimum tax, with beneficiaries including their full share of the trust’s taxable income in their tax return. Beneficiaries, with the exception of corporate beneficiaries, will be able to claim a non-refundable credit for the minimum tax paid by the trustee.
Trustees will be required to use any franking credits generated during the year to pay the minimum tax. The treatment of any remaining franking credits is still to be determined.
Corporate beneficiaries will not receive any non-refundable credits, meaning there will be no ability to generate franking credits in the company’s franking account.
An expanded rollover relief will be available from 1 July 2027 to assist small business “and others” that wish to restructure their affairs out of discretionary trusts and into other ownership structures. The rollover relief will be available for 3 years from 1 July 2027 and will provide relief from income tax and capital gains tax consequences.
MKT Comment:
Taxing trusts has been talked about on and off for decades. While acknowledging that there are legitimate reasons why trusts are used, the Government’s prevailing view based on their fact sheet is that the income generated by a trust is really the income of those that control the trust and would, but for the trust, have been included in the controller’s tax return.
The imposition of a 30% tax payable by the trustee will have significant impact on the use of trusts. That the tax will result in a non-refundable credit for beneficiaries which means trust income will always be taxed to at least 30%, which will result in a higher tax rate for some beneficiaries. It is not clear if the non-refundable credit could be used against tax payable on the beneficiary’s non-trust income.
It appears that any excess franking credits generated by the trust may get trapped at the trust level. This would clearly have implications for trusts whose sole income is derived from fully franked distributions, while having large deductions such as interest expense relating to those investments.
The minimum tax may create a real cost to trusts that distribute income to a trust that has current or carry forward losses, or distribute income to charitable organisations. None of the published material provides exclusions for these beneficiaries, so we look forward to further information being released.
If you would like to discuss any of these proposed Budget Changes please contact our MKT Federal Budget team of Ross Prosper, Mimi Ngo, Chris Schoeman or Sean Pearce.