Treasury has released the draft legislation. Here is what it says, in plain terms, and what it means for a business or investment held in a family trust.
From 1 July 2028, income earned by a family trust will carry a minimum tax of 30 per cent. The tax is paid by the trustee. Beneficiaries who receive that income get a credit for it, so nobody pays tax twice on the same dollar.
If everyone who receives trust income is already paying tax at 30 per cent or more, very little changes. The credit covers the trustee’s tax and the outcome is much the same as today.
The change is felt where trust income goes to someone on a low rate. A distribution to an adult child at university, or to a spouse who is not working, currently attracts very little tax. From 2028 that same distribution carries 30 per cent, and the credit cannot be refunded to the person receiving it. The saving simply disappears.
You will no longer be able to simply distribute to a company unless we make an election.
What Is Not Caught
A long list of trusts and income types sits outside the new tax. Primary production income is excluded, as is income going to registered charities and deductible gift recipients. Deceased estates are excluded, and so are testamentary trusts set up under a will for genuine estate purposes. Fixed trusts, unit trusts, managed investment trusts and self-managed superannuation funds are not affected at all.
Two Ways Out, and a Deadline Attached to Each
The Government has offered two alternatives to simply paying the new tax.
The first is roll-over relief. For three years from 1 July 2027 you can move the assets of a trust into a company or a fixed trust without triggering an immediate income tax bill. The relief covers Commonwealth income tax, including capital gains tax.
The second is an election.
A trust that exists on 1 July 2028 can nominate the beneficiaries who will receive its income, and the fixed percentage each will receive, and the minimum tax then does not apply. The election can only be made in the 2028–29 year, and only once. It can include a company as a fixed beneficiary.
None of this begins until 2028, but the useful decisions are made well before then. Some of the options depend on entities existing by 1 July 2028, and a trust set up after that date can never make the election at all.