Minimum trust tax to 'disproportionately' penalise those on modest incomes: NTAA

In its submission, the NTAA explained that a beneficiary can use the minimum tax offset only to the extent of their income tax liability, excluding the Medicare levy.

The NTAA noted that many taxpayers may wrongly assume that beneficiaries with taxable income above $45,000 are unaffected by the proposed changes, as this is where the marginal rate reaches 30 per cent, when they are in fact affected by the new minimum trust tax.

“A beneficiary whose only income is a $45,000 distribution bears $13,500 of minimum tax against a personal liability of $3,752, leaving an unused MTO of $9,748. Because the marginal rate between $45,000 and $135,000 is itself 30 per cent, that shortfall does not taper across the range: the unavailability of the MTO for a beneficiary on $135,000 is exactly as much as one on $45,000,” the association said. 

“The shortfall begins to close only in the 37 per cent bracket and reaches nil at $229,320.”

Alternatively, if a beneficiary was receiving a distribution of $250,000, they would be able to fully utilise the minimum tax offset and pay an additional $3,102 in tax. 

Analysis by the NTAA has indicated that for a beneficiary of a trust to make full use of the minimum tax offset, they would require an income of more than $229,320. 

The problem is not confined to beneficiaries on modest incomes, the NTAA said. 

“A business carried on by a couple through a discretionary trust that makes a net profit of $400,000 in 2027–28, distributed equally, currently bears tax in their hands of $111,204 ($55,602 each) before the Medicare levy. Under the minimum tax, the trustee is liable for $120,000. Each beneficiary’s MTO of $60,000 exceeds their own liability, and the excess of $4,398 is lost,” it said.

“It is difficult to regard $400,000 derived by a couple from their own business as modest income, yet they will pay $8,796 more tax than had they derived the same income personally – an effective rate of 30 per cent against 27.8 per cent.”

The minimum trust tax therefore has little to no impact on taxpayers in high-income ranges. 

“The measure is neutral for beneficiaries with sufficient income to absorb the MTO in full but imposes a real cost on every beneficiary below that point. It bears least heavily on precisely the taxpayers whose arrangements are said to justify it,” the submission read. 

“For these reasons, NTAA considers that this measure weighs against the equity criterion.” 

Double taxation 

The NTAA also raised deep concerns about the double taxation that will apply to corporate beneficiaries and franking credits under the new measures.

Treasury's consultation paper confirmed that income distributed to a corporate beneficiary bears the trustee’s minimum tax and is taxed again in the company’s hands, with no MTO available.

NTAA senior advocate Robyn Jacobson said this both reintroduces double taxation into the Australian tax system and converts what should be refundable franking credits into a non-refundable offset.

“Even if you just think about a company that pays a dividend to a trust, before that trust can pass on those franking credits, it has to apply them first against the new minimum tax liability,” Jacobson said.

The NTAA modelled an outcome based on a scenario where the trustee pays the minimum tax from trust funds and distributes the balance to a corporate beneficiary, which then makes a franked distribution to an individual shareholder on the top marginal rate. 

Trustee: The trust derives $100 of taxable income. The trustee pays $30 minimum tax and distributes $70 to the corporate beneficiary.

Company: The company receives $70 but is assessed on the full $100 with no MTO for the $30 already paid by the trustee. It pays $30 tax and retains $40.

Shareholder: The company makes a franked distribution of $40 with a $17.14 franking credit. The shareholder is assessed on the grossed-up dividend of $57.14. Tax at 47% is $26.86, less the franking credit, leaving $9.71 of additional tax.

Total tax: $30 (trustee) + $30 (company) + $9.71 (shareholder) = $69.71 on $100 of income, an effective rate of 69.71%.

“The $30 paid by the trustee is never recognised in the chain, because the corporate beneficiary cannot access the MTO and can frank only to the extent of its own $30 of tax,” Jacobson said.

“Income that would bear a maximum of 47 per cent if derived personally, or received directly from the trust, is taxed at an effective 69.71 per cent when it passes through a corporate beneficiary.

“That result cannot be reconciled with the stated objective of aligning trust income with the rates paid by wage earners.”

Jacobson said that double taxation was “contrary to the core principles of a good tax system”.

“Introducing the imputation system in 1987, the then Treasurer, the Hon Paul Keating, described the Bill as delivering ‘the most significant business taxation reform in this country in the post-war years – the elimination of the double taxation of company dividends’,” she said.

“Deliberately reverting to double taxation is regressive, unwarranted and an overreach.”