Discretionary Trusts and Bill Shorten

Today Bill Shorten will announce…

… a minimum 30% tax on trust distributions to those over 18 years old

The only exemption we will get in the speech is that…

…it does not apply to charitable, testamentary, deceased or farming trusts

So it looks like there will be a new tax, lets call it the Discretionary Trust Distribution Minimum Tax (or DTDMT because Treasury likes acronyms).

The DTDMT will only apply to individuals who:

  • Receive a discretionary trust distribution in their individual tax return (I assume it will also cover a partnership distribution that is made up indirectly of a trust distribution or I have already worked out how to avoid the tax); AND
  • Who have other non exempt income of less than $37,000 (where the 32.5% tax rate kicks).

The tax will be the difference between what they would have paid on the discretionary trust distribution and what they would have paid at 30%.

My five thoughts are this…

  1. This does not mean there are no benefits in income streaming from discretionary trusts, but they are just less. You would still distribute to the uni student kids but instead of them paying no tax on the first $18,200, they will pay 30%… But this is still 17% less than what the other beneficiaries might have to pay! Income splitting is still worthwhile with discretionary trusts.
  2. Discretionary trusts still get asset protection and the various CGT concessions so we will still use them.
  3. Why do farmers always get all the best concessions?
  4. If the discretionary trust runs an active business, you can avoid the DTDMT by paying the beneficiaries a salary. But there are a series of provisions that can deny the deductions of excessive remuneration.
  5. If you still want perfect income splitting without the pain of the 30% DTDMT you have two choices.

    First is set up a company that has different classes of shares, one for each potential beneficiary, where the directors can choose how much to pay each beneficiary and have the income arise in this company. You lose the CGT benefits if you sell the CGT assets out of the company but you have your income splitting.
    The second idea will probably be the first thing the Commissioner reviews as you just put a company owned by each potential beneficiary (or at least the important ones) between the trust and the individuals. Effectively, instead of the individuals being the potential beneficiaries of the trust, the individual’s 100% owned company is the potential beneficiary.

    There is a combination of the first and the second idea where you make the company with the classes of shares a beneficiary of the discretionary trust and the trust distributes to the company and the company splits its dividends to whoever the directors want to. Did someone say Part IVA?

This proposed change only raises $17 billion over 10 years and that will be larger at the back end so it is about $1 billion a year at the moment. Given the estimates of the tax lost due to income splitting using discretionary trusts are between $2 billion and $3.5 billion (the $3.5 billion by the Australia Institute who have an agreement with the Labor think tank so this will be dodgy) this will only half the benefit these trusts give.

In summary, using discretionary trusts will still be beneficial under president Shorten. But as always, we will find a way around their best laid plans…


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