- The federal government has made concessions on its plan to levy a minimum 30% tax on discretionary trusts
- New draft legislation shows trusts can choose to make fixed distributions to pre-nominated beficiaries
- It may allow some to pay a lower tax rate than 30% and avoid hefty restructuring costs
- The business lobby says the change will benefit few small and medium-sized businesses
Treasurer Jim Chalmers announced changes to the proposed tax regime, now allowing discretionary trusts the one-off option to make fixed distributions to pre-nominated beneficiaries.
The federal government released draft legislation on Thursday, including the concession on its earlier budget announcement that all discretionary trusts would pay a minimum 30% tax rate.
The changes will mean trusts can still distribute income, which may minimise the tax they pay, but there will be no changing distributions and beneficiaries once they are nominated.
The federal budget announcement on trust tax laws sent many 'mum and dad' investors and small businesses using discretionary trust structures into a panic.
Restructuring out of a trust entails significant set-up costs, including stamp duty on the transfer of assets levied by state and territory governments.
It could see some trusts facing hundreds of thousands of dollars in stamp duty costs, particularly if they are transferring properties.
The states have so far declined to ease stamp duty charges for restructuring triggered by federal government changes.
Little benefit: business lobby
But the Australian Chamber of Commerce and Industry said the latest change is likely to benefit few businesses.
"[It] fails to recognise the variability in incomes of small businesses and the need for flexibility which is why they choose to structure as a trust," CEO Andrew McKellar said.
It's estimated around 490,000 small businesses use discretionary trusts to protect business assets, manage irregular income, and provide flexibility in distributing profits, such as between business partners or family members.
In effect, this allowed trustees to distribute income to those on lower tax rates and it was this outcome the federal government was trying to subvert with its minimum 30% tax rate.
The federal government originally forecast its budgetary changes would claw back around $4.5 billion a year.
How will the new law work?
Essentially, the change will allow a discretionary trust to choose to make fixed distributions to pre-nominated beneficiaries, either individuals or companies.
This will only apply to trusts that existed before 1 July 2028.
Beneficiaries will then pay tax on their distribution at their marginal or company tax rate which may be below the 30% minimum that will apply to newer trusts.
Changes to nominated beneficiaries are only allowed in cases of death or family breakdown.
Penalties will apply for trustees making distributions outside the prescribed set-up.
It's thought genuine 'mum and dad' investors will continue to be able to apportion trust income to one partner on a lower marginal tax rate than the other.
However, it's foreshadowed many businesses will elect to restructure anyway despite the new concession.
The federal government has promised some relief from capital gains and income tax through a three-year rollover period, although it will have no control over state-imposed stamp duty,
The draft legislation has been released for consultation until 18 September.
The federal government has already backed down on the 30% minimum tax rate affecting testamentary trusts, labelled a 'de facto death tax', and will also exempt charitable trusts and trust donations to community and sporting groups.