‘We don’t have crystal balls’: Trust tax rigidity causing angst

“On top of this, we don’t have quite as much detail on these measures at the moment. We do have some draft legislation now, but it’s only in draft. People are a bit wary of acting on that or getting too far ahead of themselves when the details aren’t final yet. You can certainly get bitten if you jump in too early and get too far ahead of yourself before things are finalised.”

The government’s draft legislation to implement the main elements of the 30 per cent minimum tax on discretionary trusts added a new option to allow a trust to be exempt from the minimum tax if it elects to make fixed distributions to pre-nominated beneficiaries as an alternative to rollover relief. The election would not require a restructure and is not expected to trigger state and territory stamp duty, according to the government.

Treasurer Jim Chalmers said the draft legislation includes options to reduce or eliminate restructuring costs for small businesses and others who use discretionary trusts.

However, under this proposed electable regime, nominated beneficiaries could only be added or changed later, when a nominated beneficiary passes away, or there is a family breakdown.

While noting that this offers some flexibility, Carruthers said this is only allowed in limited circumstances, and there are restrictions on who could be a replacement.

“I think it would be nice to see more flexibility added in some sensible ways that take into account changes that could occur in a typical economic group over a period of time. As it stands, the draft legislation leaves little room for any flexibility down the track,” he said.

Carruthers observed this lack of flexibility is causing significant angst among practitioners. He noted that trusts can only either opt for the rollover relief or elect to make the fixed distribution, but they cannot do both.

“Once you’ve chosen one pathway, you really can’t go back on it,” he said.

While Carruthers welcomed the options proposed in the draft legislation, he said the “inflexible” election option should be approached with caution and that there is very little time to decide whether to make an election or not.

“Once you make it, you’re pretty much stuck with it. It can be revoked, but it can never be made again,” he said

“Many people are going to have to make some pretty big decisions. That’s a bit hard when we don’t have crystal balls. We don’t know exactly what’s going to happen in the future. I think that’s going to require some difficult analysis to be done by accountants.”

On top of this, once someone makes an election, they are preventing the trust from using the limited rollover relief, Carruthers warned.

“I would approach this very carefully. It certainly wouldn't be something that you just jump into and make as a matter of course. It needs the client to be involved in that decision-making process because ultimately the impact is on them. They should be aware of the pros and cons, the potential restrictions, and how that could play out in the future.”

Based on conversations Carruthers has undertaken, he said some accountants are proactively identifying clients who have trust structures and could potentially be materially impacted by the changes should they be legislated around the rate of tax they may have to pay.

“Some accountants are finding that there are groups of clients within their practice who may not be affected quite as much as others, given the marginal tax rates that are already being paid by the beneficiary group,” he said.

“For others, there’s potentially some big decisions coming up over the next 12 months or so. There’s a lot to get your head around in terms of those decisions. It’s important to keep in mind that just because this may not affect some clients now doesn’t mean it won’t in the future. Circumstances and income levels can change over time. There’s quite a bit to take into account.”

As for the approach accountants could take at this point in time, Carruthers advised against rushing into any strategies before the proposals are legislated and more detail is available.

“We’re being told to expect further tranches of legislation at a later date. You probably wouldn’t want to rush into anything until we have the full picture.

“Secondly, it’s easy to focus on the short-term impact of these reforms on your clients, but this may lead to problems down the track. It’s important to have a longer view so we can flesh out any issues and understand what the decisions today could mean tomorrow,” Carruthers said.