What would Labor’s Discretionary Trust Minimum tax look like?

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.

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