Author: Charlie Dang

From 1 July 2028, trustees will pay a minimum tax of 30 per cent on the taxable income of discretionary trusts. Beneficiaries, other than corporate beneficiaries, will receive non-refundable credits for the tax payable by the trustee.

The minimum tax will not apply to other types of trusts such as fixed and widely held trusts (including fixed testamentary trusts), complying superannuation funds, special disability trusts, deceased estates and charitable trusts. Some types of income such as primary production income, certain income relating to vulnerable minors, amounts to which non-resident withholding tax applies, and income from assets of discretionary testamentary trusts existing at announcement will also be excluded.

Rollover relief is expected to be available for three years from 1 July 2027 for eligible restructuring arrangements.

This 30% minimum tax on the taxable income of discretionary trusts is recorded as a tax credit which can be passed on to certain beneficiaries. Beneficiaries can claim the tax amount paid by the trustee as a tax credit in the beneficiaries’ tax return. It has been announced that the tax credit is non-refundable for non-corporate beneficiaries. On the other hand, corporate beneficiaries will not receive tax credits. This restriction is to prevent corporate beneficiaries from converting non-refundable tax credits into refundable franking credit.

What is the policy intent behind this tax change?

This proposal for change is considered to address issues with ‘trust income stripping’ arrangements which push ‘trust income’ to low-tax or tax-exempt entities including individuals and foreign entities for obtaining tax benefits and direct the economic benefits to other Australian residents. The current tax law targeting these issues is section 100A on ‘reimbursement arrangement’.

The application of the proposed change will enable the Government to collect tax on income when it is first derived at the trust level before further assessments at the beneficiary level.

This change is also the Government’s response to the existing issue of trading trusts which have been restricted from retaining their profit from carrying on a business due to the penalty rate (i.e. 47%) under section 99A. It gives the trustees the choice to legally retain their trading profit as working capital and pay tax at 30% rate. This puts the full stop for complex arrangements which use ‘bucket companies’ and ‘Unpaid Present Entitlement’ (UPE) to obtain tax benefits.