FAAA flags gaps in discretionary trusts tax reforms, deficient framework

Under the proposed minimum tax on discretionary trust reforms, the Financial Advice Association Australia (FAAA) highlighted concerns over trustees potentially being forced to make "major and largely irreversible decisions" before the rules and guidance have been finalised.

Treasury released the draft legislation on the 30% minimum tax on discretionary trusts in early September, consulting on how the minimum tax will work, what types of trusts and income should be excluded and how a fixed trust should be defined.

One of the proposed changes is introducing a new option for discretionary trusts to be exempt from the minimum tax if they elect to make fixed distributions to pre-nominated beneficiaries, as an alternative to roll-over relief. The election would not require a restructure and is not expected to result in state and territory stamp duties.

Trustees will also be able to nominate individuals and entities that are capable of benefiting under the trust from 1 July 2028, including eligible companies and trusts, with no limit on the number of beneficiaries that can be nominated.

The association believes some of the new pathways proposed are too rigid and could unfairly penalise people who make genuine mistakes or experience normal life events such as family changes, succession planning or circumstances beyond their control.

"Important practical issues remain unresolved, including state and territory stamp duty consequences, the treatment of beneficiaries under the excluded election trust (EET) regime, the operation of the roll-over provisions, and the potentially substantial compliance and professional advice costs associated with understanding, implementing and maintaining the new arrangements," the FAAA wrote in its submission.

"The FAAA supports appropriately targeted integrity measures but considers that further refinement of the package is necessary before the legislation is enacted."

The submission highlighted three pathways trustees of discretionary trusts will need to assess: remaining within the minimum tax regime, choosing the EET model or restructuring under the transitional roll-over option.

Treasury stated in the explanatory memorandum it has yet to release further legislation to address residency, CGT, international taxation, administrative and reporting requirements, and integrity considerations.

Consequently, the FAAA pointed out taxpayers and their advisers are being asked to evaluate the costs, benefits and risks of each pathway without a complete understanding of how the broader framework will operate in practice.

"This is likely to increase complexity, require additional professional advice, and result in significant unnecessary implementation and compliance costs. This uncertainty is particularly significant, given that discretionary trusts are commonly used for a range of non-tax purposes," the association said.

It is therefore recommending Treasury to complete the minimum tax framework before commencement and defer key implementation deadlines until taxpayers, and their advisers have sufficient certainty about how the regime will operate.

"This would reduce unnecessary complexity and compliance and advice costs, while helping taxpayers make informed decisions about whether restructuring, electing into the EET regime or remaining within the minimum tax framework is appropriate," the FAAA said.