Is this the ‘optimal path’?: Trust tax reform creates burdensome system

“Perhaps there were alternative paths to achieving its policy objectives without creating an overly burdensome system for taxpayers and the ATO which is going to have to administer and apply the new laws.”

The government’s draft legislation to implement the core components of its 30 per cent minimum tax on discretionary trusts added a new option that allows 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 the government said it does not expect this to trigger state and territory stamp duty.

Ortner warned that the proposed 30 per cent minimum tax would add yet another set of rules for taxing trust income to a system already difficult for taxpayers to navigate and the ATO to administer.

Moreover, tax professionals and the relevant industry bodies were not given enough time to offer technical feedback on the development of the draft legislation, he added.

Treasury released the consultation paper on the proposed trust tax reforms on 8 July, with submissions closing on 31 July 2026. The exposure draft legislation – which contained exposure drafts and explanatory materials on the minimum tax, imposition bill, rollover relief, and the electable regime – opened for consultation on 3 September and closed on 18 September 2026.

“Collectively, we have had less than six weeks of consultation across these two periods on what is considered to be some of the most substantial changes to the taxation of trusts in the last 30 years. That’s not enough,” Ortner said.

As a consequence, there could be gaps in the drafting of the legislation, leading to interpretive differences, he said.

“That could then increase the risks of future disputes with the ATO,” he said.

Ortner said it is difficult to specify at this stage what disputes might arise, particularly as the final legislation has not been released yet. But he noted that some areas are causing confusion, including the rollover relief.

This will be available for three years from 1 July 2027 for those who opt to restructure out of a discretionary trust into other arrangements such as a company or a fixed trust.

For example, he asked what cost base members will receive in the replacement entity, noting that the legislation currently suggests that members will have cost base to the extent that the replacement interests were issued to those members as consideration for the transaction.

“The draft appears to assume that interests issued to family members can be consideration for assets transferred by the trustee,” Ortner said.

“At present, it is difficult to see how a member will obtain any cost base as the issue of replacement interests is not necessarily consideration, in the ordinary sense of the term, for the assets transferred by a different person. This could lead to adverse tax consequences.”

Furthermore, Ortner voiced concerns for groups that have trusts with existing tax losses within family trust elected structures.

As Pitcher Partners outlined in its submission to Treasury’s consultation paper in July, many taxpayers have accumulated losses and structured their affairs based on current laws that allow them to use those losses within family groups.

However, under Treasury’s proposal, tax could be imposed before the benefit of those losses can be realised. The restructuring facility for transfers of assets out of discretionary trusts may not benefit those taxpayers in using past tax (or capital) losses if they are left behind in the discretionary trusts.

“Under the government’s current proposal for the minimum tax on discretionary trusts, family groups that have losses spread across multiple entities will no longer be able to utilise those losses in the way they historically have, even though they’ve structured their affairs legitimately based on the law of the day,” Ortner said.

“There really needs to be some transitional relief to permit those family groups to utilise those losses in the way they have historically. Otherwise, the measures are operating inappropriately and will be inconsistent with sound tax policy.”

The treatment of corporate beneficiaries is also a cause for concern, as a company receiving a trust distribution would continue to be taxed on that income, but would not receive a credit for the minimum tax already paid by the trustee.

“Corporate beneficiaries should be permitted a credit to ensure that there isn’t double taxation,” Ortner said.

“If corporate beneficiaries were provided with a credit, it would fundamentally do away with the need for most, if not all, taxpayers to restructure or use the excluded election trust or the rollover. That would significantly simplify the system for taxpayers, advisers and the ATO.”