Proposed Discretionary Trust Taxation

The government proposes that from 1 July 2028, a 30% minimum tax will apply to discretionary trust income. In short:

  • The trust will pay the minimum tax, regardless of how the income is distributed. Beneficiaries will still declare distributions in their own tax returns.

  • Non-corporate beneficiaries will receive non-refundable tax credits for tax paid by the trustee. Credits can offset their own tax liability, but cannot generate refunds. Corporate beneficiaries will not receive any credits and will still be taxed on distributions received.

  • Certain trust types are to be excluded, such as fixed trusts, superannuation funds, charitable trusts, and special disability trusts. Certain income types will also be excluded, in particular primary production income. Unfortunately, primary production income does not include income from lease of farmland.

  • There will be a 3-year rollover relief period available from 1 July 2027, which will allow people to restructure out of discretionary trusts, which is clearly the goal of the government.

There are lots of impacts as a result of this proposal:

  • Low-income beneficiaries will have to pay a higher tax than their marginal rate.

  • Income splitting strategies will no longer work to minimise tax

  • There will effectively be double taxation on distributions to corporate beneficiaries, one at the trust level and one at the beneficiary level

  • Operating through a discretionary trust will become less tax efficient than operating through a company, where the company’s tax rate is 25%

Testamentary Discretionary Trusts (“TDTs”)
These are a subset of Discretionary Trusts. They are special creatures, because, unlike inter vivos Discretionary Trusts, they can distribute income to a minor beneficiary at adult marginal tax rates, including the tax-free threshold of $18,200.

The 3 categories of testamentary discretionary trusts and the corresponding tax treatment is summarised below:
Existing Testamentary Trust: Exempt from the proposed minmum 30% tax on distributions

Existing Wills with Testamentary Trusts (testator still alive): Captured by the proposed minmum 30% tax on distributions

Future Wills with Testamentary Trusts: Captured by the proposed minimum 30% tax on distributions

This proposed minimum tax will impact the most vulnerable, being those who do not earn over $45,000 p.a, both minors and adults. Anyone who already earns over $45,000 p.a. will already be paying 30% tax on any income they receive from a TDT.

Tina Cooper