FROM July 1, 2028, a distribution of taxable income from a discretionary trust to a beneficiary of the trust will be taxed at 30 per cent in the hands of the trustee.
An individual beneficiary will receive a non-refundable credit for the tax paid. Broadly, if the beneficiary’s marginal tax rate prior to the distribution was already 30 per cent or more, the measure should not result in more tax paid overall.
For individual beneficiaries on lower tax rates, broadly those whose taxable income is less than $45,000 (before the distribution), the non-refundability of the credit means a higher tax is paid overall.
This is because the tax paid by the trustee of 30 per cent will exceed the income tax that would otherwise be paid by the beneficiary. This is designed to apply to discretionary trusts being used to split income to lower taxed beneficiaries.
In order to discourage the use of corporate beneficiaries, no credit for tax paid by the trustee will be available for a distribution from a discretionary trust to a company.
As a result, amounts distributed to a corporate beneficiary may be taxed twice: first at 30 per cent and then again at 30 per cent of the remaining 70 per cent.
This produces a tax rate of 51 per cent at the corporate level and an effective tax rate of up to 62.9 per cent on those profits when ultimately distributed to an individual.
However, depending on precise details of the measure, it may be that the company pays 30 per cent on the full grossed-up amount, resulting in effectively 60 per cent tax at the corporate level and 69.7 per cent on ultimate distribution to an individual.
Franked distributions flowing through a discretionary trust will be subject to the 30 per cent tax rate, however the credit is to be used to offset and reduce the trustee’s tax liability.
This measure is estimated to increase receipts by $4.5 billion over the next five years.
Examples
Example 1 – Company to Trust to Individual
A company earns $100 business income and pays company tax of $30 at the 30% rate.
The remaining $70 is paid as a fully franked dividend to a trust. The franking credit attached to the dividend reflects the $30 of company tax already paid.
When the trust distributes the income to an individual, it is required to withhold tax at 30%, being $30.
However, the franking credit of $30 attached to the distribution offsets the trustee’s 30% tax liability in full. As a result, no additional tax is payable by the trustee.
While exact details are not yet available, the individual is presumably assessed on $100, being the cash distribution plus the franking credit, and has a 47% tax liability equal to $47.
The credit of $30 for the trustee tax reduces this liability, leaving $17 in additional tax payable.
In total, $47 of tax is paid on the $100 of income, resulting in an overall tax rate of 47%.
Steve Bragg
Example 2 – Company to Trust to Individual with Deductions
The facts are the same as Example 1, except that the individual has $50 of deductions and therefore has taxable income of only $50.
The tax liability at 47% on $50 is $23.50. For the purpose of this example, assume for simplicity that the top marginal rate of tax applies from taxable income of $0.
The trust is still required to pay tax of $30 on the distribution, which is effectively reduced to nil by the $30 franking credit attached to the dividend.
As the individual will now have a non-refundable $30 credit for trustee tax, rather than a $30 refundable franking credit, the $23.50 tax liability can only be reduced to nil, rather than resulting in a $6.50 tax refund.
As a result, despite the individual’s tax liability being only $23.50, the effective tax borne on the distribution is $30 representing an effective tax rate of 60% on $50 of overall taxable income.
Exclusions
There are some exclusions. Pitcher Partners said the minimum tax will not apply to certain trusts and categories of income.
“Excluded entities include fixed trusts and widely held trusts, complying superannuation funds, charitable trusts, special disability trusts and deceased estates,” it said.
“In addition, specific types of income are carved out of the regime, including primary production income, certain income derived by vulnerable minors, amounts that are already subject to non‑resident withholding tax, and testamentary trusts in existence on May 12, 2026.”
Roll-over relief – transitional measures
There will be some expanded roll-over relief to allow restructuring out of discretionary trust structures.
“The proposed relief is intended to ensure that, for a limited period, restructures from discretionary trusts into alternative ownership vehicles – such as companies or fixed trusts – can occur without adverse income tax consequences, including capital gains tax,” it said.
“The roll-over relief will be available for a three‑year window from July 1, 2027 to June 30, 2030.
“This measure may provide a pathway for some groups to restructure into corporate or fixed trust structures, particularly in response to the potential for effective tax rates of 60 per cent or more on trust distributions.”
The report said many businesses are land rich – such as car dealerships – meaning that any restructure may trigger substantial stamp duty costs.
“These and other commercial and transactional considerations may significantly limit the extent to which the roll-over relief can be used in practice,” he said.
Distributions to other trusts
Pitcher Partners said that changes would also apply to distributions from a discretionary trust to another trust.
“As the trustee‑level tax is non‑refundable, a distribution to another trust that is in a tax loss position may still be subject to tax at an effective rate of 30 per cent, even if those tax losses are used,” it said.
“This effectively prevents trust losses being used against income from other related discretionary trusts.
John Gavljak
“By comparison, a consolidated group structure would appear to be taxed more favourable as it allows losses from one group member to be automatically offset against income from another member.”Small business interaction
Pitcher Partners said small businesses will be able to reduce the impact of the minimum tax by employing beneficiaries working in the business, rather than paying them a trust distribution.
“Payments of salary or wages to employees of small businesses will not attract the minimum tax,” it said.
“Small businesses that choose to restructure into a company will benefit from access to dividend imputation and a lower 25 per cent corporate tax rate where their aggregated annual turnover is less than $50 million and no more than 80 per cent of their assessable income is passive income.”
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By Steve Bragg and John Gavljak
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