Trust tax changes could impose 62.9% tax rate on smaller taxpayers

The Treasury fact sheet on the minimum tax said 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 used when a business owner reinvests profits in the 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] whether it 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 that while the changes are clearly designed to make trusts unviable, they do 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 syste,m but it completely misses the point."

The budget measures, he said, try to address this issue in isolation, but they're unconnected to any broader reform.

"As a result of that, you're going to get more complexity, and it's really just treating the symptom."