‘Very poorly thought out’: Minimum trust tax to sting low- to middle-income earners

“High income earners don’t pay a dollar more in tax as a result of this measure.”

“The policy has been very poorly thought out for them to say that this is about equalising tax of businesses with salary and wage earners. The reality is that if you're a high net worth individual with a really good business through a trust, this has no impact whatsoever on you from a net tax position. It's just ridiculous.”

In his submission to Treasury on the draft legislation to implement the core components of this policy, Block said the non-refundable design means the measure collects no additional tax from beneficiaries with taxable income above around $229,000.

For example, he continued, a beneficiary with $200,000 of existing income receiving a $100,000 trust distribution does not pay one additional dollar of income tax. Instead, this entire burden would fall on beneficiaries earning below that level. They would have to pay up to $9,748 per annum for incomes between $45,000 and $135,000.

“The government said this proposed tax is about equalising income and aligning it with salary and wage earners,” Block said.

“But the trust income earner pays so much more tax than the salary and wage earner. It’s not really equal at all. It’s just a higher rate of tax applying to a business owner that operates through a trust.”

The draft legislation 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 government said it does not expect this to trigger state and territory stamp duty, and added that the election would not require a restructure.

However, Block said the excluded election trust (EET) “doesn’t work and it’s too rigid for it to work”.

In his submission, he provided an example of a couple that owns a café through a family trust with both spouses working in the business. In 2028-29, the café produces trust taxable income of $120,000, which is shared equally between them, and a 50/50 nomination is a feasible option if the trustee makes an EET election at commencement.

Two years later, the café is struggling as its income falls to $60,000 and the wife takes an outside job paying $60,000, leaving the family’s total income unchanged at $120,000. Under the current law, the trustee would distribute the café income to the husband, for whom it is now his only income.

“The café’s income has halved, and the family’s total income is unchanged at $120,000,” the submission said.

“Yet the minimum tax collects 59 per cent more from them each year than from a neighbouring household earning the identical $120,000 entirely from wages.”

Furthermore, Block said the EET election would worsen their position as the couple would be locked into the natural 50/50 nomination when both of them worked in the business.

“The trustee cannot now respond to their changed circumstances as distributing the café income to the husband would be inconsistent with the nomination, automatically revoking the election, taxing the trustee at the top marginal rate plus Medicare levy on the trust’s income in that year ($28,000 on the café’s $60,000) and applying the minimum tax in every subsequent year with no ability to ever re-elect.”

Block said the fixed distribution option is “unfair” unless they offer the option of making it changeable, which mirrors the current law where the trust can change the distribution mechanism each year.

“For example, you’ve got a property in a trust, and you make this election, and it’s 50/50. If you go through a divorce down the track or there’s a death in the family or there are other unforeseen circumstances, you’re stuck with this minimum tax because you had to make this election,” Block said.

“If you change the distributions down the track, the election forces you to pay this minimum tax.”

In his submission, Block recommended that the minimum tax offset for beneficiaries should be refundable on the same mechanics as franking credits. The trustee pays 30 per cent on all trust taxable income as drafted. Each beneficiary is assessed at marginal rates on their share of the trust’s taxable income, applies the offset, and any excess is refunded on assessment of a lodged return.