Government offers alternative to restructuring in trust tax legislation

The government has added a new option which enables a trust to be exempt from the minimum tax if they elect to make fixed distributions to pre‑nominated beneficiaries, as an alternative to roll‑over relief. The election would not require a restructure and is not expected to trigger state and territory stamp duty, the government said. 

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

"The election will be in place until it is revoked by the trustee, or is automatically revoked. An election will be automatically revoked where the trustee makes distributions inconsistent with the election," Treasury said in its fact sheet on the changes.

"Upon revocation, the trustee will be subject to the highest marginal tax rate plus Medicare levy in that income year, with the minimum tax applying to subsequent income years."

A new definition of fixed trust

The government will also introduce a new fixed trust definition which will apply more broadly for tax purposes.

Explanatory materials said that the new fixed trust definition will ensure that a trust can be considered a fixed trust for income tax law if there are no material discretionary elements affecting the entitlements or rights of the trust’s beneficiaries.

Treasury noted that during the consultation stakeholders had warned that relying on the existing definition of fixed trust may result in the scope of discretionary trusts for minimum tax purposes being broader than intended.

"In light of this feedback, an expanded, codified definition of fixed trust will be adopted to help ensure that a range of modern commercial trusts, which are not intended to be captured by the minimum tax, are excluded.

"This definition will apply across the whole tax law and address longstanding concerns with the definition of fixed trust in the law."

Two-week consultation period

The government has again provided only a short time frame for consultation on the draft legislation, with consultation due to close on 18 September.

Interested stakeholders have also been encouraged to reach out to Treasury early in the consultation period.

Chalmers said the government would continue to finalise implementation of these changes in further tranches of legislation, including administrative and integrity arrangements as necessary. 

"Legislation to address implementation of the 2018 budget measure on unpaid present entitlements that was announced but not enacted by the previous Government will be progressed separately," he said.

"The government thanks the many stakeholders and community members who have already contributed to the consultation process and invites further feedback on this reform."