It looks like Labor may keep one tax promise from the last election and run it in this election. And it is a big change to our favourite discretionary trusts. Everything below is just from the policy document from last election.
Labor MAY introduce a standard minimum rate of tax of 30% for discretionary trust distributions to mature beneficiaries (aged over 18). They proposed 30% so it aligns “with the rate for passive investment companies which also face a 30 per cent rate of tax.”
Here is the example they gave last election…
John is a partner in a top law firm. John has a spouse who doesn’t work and two children who attend university and don’t work. He earns $500,000 each year from his membership of his partnership which he pays PAYG tax on at the top marginal rate.
John has a discretionary trust because in addition to his partnership distribution. His discretionary trust receives a percentage of the profits from his law firm at the end of each financial year.
This year the discretionary trust receives an additional $210,000. Because John is on the top marginal tax rate his accountant advises him that he distribute the $210,000 equally amongst the three non-working members of the family, where $70,000 is given to each.
Under the current tax arrangements, this would give the family members a tax bill of $47,100, a $51,600 tax saving compared to the income tax John would have paid at the top marginal tax rate.
Under the new arrangements, if John distributed the $210,000 in the same quantities to his family, each $70,000 trust distribution would be taxed at the new minimum rate of 30%, which would result in a tax bill of $63,000, an increase of $15,900 compared with the current tax rules.
While not clear, my guess is the beneficiary will have to pay the “top-up tax” to get the rate up to 30%, rather than the trustee. But if I was writing the law I would put a 30% withholding on discretionary trust distributions that must be withheld by the trustee to collect the tax and then only have a beneficiary pay top up tax if their marginal tax rate is above 30%.
This new tax will not apply to:
- Special disability trusts
- Testamentary Trusts (Deceased estates)
- Fixed trusts
- Cash management unit trusts
- Fixed unit trusts
- Public unit trusts (listed and unlisted)
- Farm trusts; and
- Charitable and philanthropic trusts
Given that from 1 July 2024, once you start to earn $45k to $200k your tax rate will be 32% (30% plus Medicare Levy), if you earn under $200k the benefit of streaming through a discretionary trust is just 2% if this goes through.
But over $200k the tax rate will be 47% so there will still be a 17% tax benefit in streaming through a discretionary trust.
So if it gets up we will still use discretionary trusts, but they wont be worth it for those earning under $200k (pretty much the case now) and they wont be as much of a benefit to those earning much more.