Treasury launches minimum tax on discretionary trusts draft legislation

Treasury has released draft legislation on the minimum tax it is set to impose on discretionary trusts from 1 July 2028.

A 30% minimum tax on certain discretionary trusts will apply and be payable by the trustee.

Treasury is seeking feedback on several changes that include how the minimum tax will work, what types of trusts and income should be excluded and how a fixed trust should be defined.

The treatment of income tax-exempt entities and excess franking credits, as well as roll-over relief is also up for discussion.

Under the proposed changes, non-corporate beneficiaries will be able to claim a non-refundable tax offset for the tax payable by the trustee in respect of their share of trust income. The tax is designed to better align the tax rate on trust income with the tax rates paid by workers.

The new tax will not apply to fixed trusts, widely held trusts, attribution managed investment trust (AMITs), superannuation entities or charitable trusts.

That is because those types of trusts are either not discretionary trusts, the explanatory memorandum states, or are subject to separate regulatory and taxation arrangements, which the minimum tax is not intended to change.

There will be 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.

The minimum tax will also not apply to certain types of income. Primary production income, certain income relating to vulnerable minors, certain income relating to charitable and not-for-profit beneficiaries, amounts to which non-resident withholding tax applies, and income from testamentary trusts established for genuine testamentary purposes will be excluded.

Treasury is taking submissions until September 18.

Treasurer Jim Chalmers said the draft legislation takes into account stakeholder feedback received in response to the consultation paper released in July.

That consultation focused on expanded rollover relief to support restructuring, the treatment of excess franking credits and ways to collect the minimum tax.

Discretionary trusts allow lower tax rates to be achieved through 'income splitting', whereby trustees of discretionary trusts allocate all or part of their income to beneficiaries who have a lower marginal tax rate, arrangements that are not available to most workers.

"These arrangements can result in high-income and high-wealth taxpayers who structure their affairs using discretionary trusts, paying less tax relative to salary and wage earners on similar income levels, or paying similar tax relative to salary and wage earners on lower income levels. This reduces the progressivity of the tax system," Chalmers said.

Going forward, the trustee of a discretionary trust will continue to determine the share of trust income that beneficiaries are entitled to each year. Beneficiaries will continue to be responsible for including trust distributions in their income tax returns and assessed on their share of the trust's taxable net income, in proportion to their entitlement to the income of the trust.

"However, the trustee will now pay a minimum 30% tax on the taxable income of the trust. Amounts already taxed in the hands of the trustee will generally not be affected by the tax. If no beneficiary is made entitled to trust income, the highest marginal rate plus the Medicare levy will continue to generally apply to the income in the hands of the trustee," he said.

Treasury estimates that less than 10% of the country's 2.7 million active small businesses will be affected by these reforms in any given year.