iscover Trust tax changes could impose 62.9 per cent tax rate on smaller taxpayer
BusinessThe government's proposal to deny corporate beneficiaries a credit for tax paid at the trust level means taxpayers could be hit with tax rates of 62.9 per cent, warns a tax expert.
Tax professionals have raised significant concerns with the government's proposal to impose a 30 per cent minimum tax on discretionary trusts from 1 July 2028, including how the measure will impact distributions to corporate beneficiaries.
Grant Thornton national head of technical tax, private enterprise and author of Tax Wars, David Montani, warned that the proposed policy will see the use of corporate beneficiaries effectively "killed off" from 1 July 2028.
The Fact Sheet provided by Treasury on the minimum tax outlined that under the policy "corporate beneficiaries will be assessed based on the trust income to which they are entitled, without being able to claim credits for tax payable by the trustee".
The government said the changes would "reduce the incentive for trustees to distribute to corporate beneficiaries set up just to receive trust distributions from discretionary trusts".
Montani noted that corporate beneficiaries are commonly use where a business owner is reinvesting profits in a business.
"If you're reinvesting profits in a business, you can do so at the company rate so you're investing 70 or 75 cents in the dollar but under the proposal, you won't get a credit for the tax paid by the trust," he said.
He noted that the budget papers and fact sheet don't provide any information about how the company will be taxed.
"At a minimum, if the trust has $100 of taxable income it will pay 30 per cent on that. If it then distributes that income to a company, [we currently don't know] if that will be taxed on the full $100, the $70 or none of it. Either way, the least bad scenario is that the company will just have that $70 in retained profit but of course no credit of any kind comes through," he explained.
"So you extract that $70 from the company as a dividend and it will basically come out as an unfranked dividend. If you're in the top tax rate, then 47 per cent of that is 32.9 per cent.
"So that original $100 is taxed $30 on the trust, $32.9 when it comes out of the company, amounting to 62.9 per cent tax. It could be worse than that, but it won't be any less than that."
Montani said while the changes are clearly designed to make trusts unviable, it does this through a very punitive measure.
"It also misses the bigger picture which is the over-reliance of income tax in our tax system," he said.
"In all fairness, superannuation is taxed too lightly and assets are probably taxed a bit too lightly. [These measures] are trying to move away from structures that give a bit more flexibility on the income tax side of our income tax system but it completely misses the point."
The budget measures, he said, try to address this issue in an isolated way, but they're unconnected to any broader reform.
"As a result of that you're going to get more complexity and it's not really treating the symptom."
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Miranda Brownlee
Miranda Brownlee is the editor of Accountants Daily and Accounting Times, the leading sources of news, insight, and educational content for professionals in the accounting sector.
Miranda has over a decade of experience reporting on the financial services and accounting sectors, working on a range of publications including SMSF Adviser, Investor Daily and ifa.