The Federal Government is currently consulting on proposed changes to the way discretionary trusts are taxed, with a particular focus on distributions made to corporate beneficiaries (often referred to as “bucket companies”).
While these changes are not yet law, they have sparked significant discussion across the accounting, legal and business communities. So, what exactly is being proposed, and what could it mean for Australian businesses?
What’s being proposed?
Treasury is considering introducing a 30% minimum tax on certain income distributed from discretionary trusts to corporate beneficiaries.
Discretionary trusts are commonly used by:
- Family businesses
- Farming enterprises
- Professional practices
- Investment and property groups
These structures are legitimate and widely used for succession planning, asset protection and managing business operations.
Why are some experts calling it “double taxation”?
One of the biggest concerns raised during the consultation process is that the proposal could result in the same income being taxed more than once.
For example, if a discretionary trust earns $100,000 and distributes that income to a corporate beneficiary:
- the trust could pay 30% tax on the distribution;
- the receiving company could then also pay 30% company tax because it may not receive a credit for the tax already paid by the trust.
Australia’s current dividend imputation system is designed to prevent profits from being taxed multiple times by allowing tax credits (known as franking credits) to flow through to shareholders.
Critics of the proposal argue that the new rules would undermine that long-standing principle.
Could the effective tax rate really approach 70%?
Industry modelling suggests that once trustee tax, company tax and personal tax are all taken into account when profits are eventually distributed to shareholders, the total tax paid on the same income could approach 69.7% in some circumstances.
Supporters of the proposal describe it as a minimum tax, while critics argue it operates more like a form of double taxation.
Who could be affected?
Although the proposal is intended to strengthen the integrity of the tax system, industry groups have raised concerns that the changes may affect more than just high-income taxpayers. Depending on how the final legislation is drafted, those potentially impacted could include:
- Family-owned businesses
- Farmers
- Self-funded retirees
- Investment and property groups
- Beneficiaries on lower incomes
- People with disabilities
One area attracting particular attention is the proposal that some tax offsets would be non-refundable, meaning certain beneficiaries may pay more tax than they otherwise would under the current system.
What happens next?
At this stage, these are proposed changes only. Treasury is consulting with industry stakeholders before any legislation is introduced, and the proposal may be revised following feedback.
The Government’s stated objective is to improve the integrity of the tax system and reduce inappropriate tax planning. Many industry submissions support that objective but argue it should be achieved without creating unintended consequences such as double taxation.
What should you do?
There is no need to make immediate changes to your business or trust structure while the proposal remains under consultation. However, if you operate through a discretionary trust or have a corporate beneficiary as part of your business or investment structure, it’s worth staying informed.
As more detail becomes available, we’ll continue to monitor the proposed reforms and provide practical guidance on what they could mean for you.
If you have questions about how these proposed changes may affect your business or investment structure, speak to the MWM team.
