BDO submission to Treasury: why a ‘clearer definition’ is needed

In its submission to Treasury’s Minimum tax on discretionary trusts consultation paper, BDO has supported the government’s objective of addressing income-splitting opportunities through discretionary trusts, yet believes that aspects of the proposed regime require refinement to ensure it operates fairly, efficiently, and in line with policy intent.

The key submission is that the minimum tax should apply only to trusts in which the trustee, appointor, or another person has substantive discretion to determine who receives income or capital, or how much each beneficiary receives, in a manner materially equivalent to that of a family discretionary trust.

BDO indicated that it should not apply to commercial trusts, unit trusts, or other trusts in which investors’ economic entitlements are objectively determined by their units, interests, or participation rights.

In particular, within the submission, it was noted that the legislation should confirm that a trust is outside the minimum tax where beneficiaries or members have clearly defined, proportionate, and economically fixed rights to income and capital, subject only to ordinary commercial, administrative, fiduciary, or regulatory powers.

Within the submission, BDO displayed four major key themes:

A clearer definition of discretionary trusts

BDO recommended that the proposed minimum tax should apply only to trusts that provide genuine discretionary income-splitting flexibility.

Relying on the existing tax law concept of a "fixed trust" could unintentionally capture commercial trusts and unit trusts that do not present the policy concerns the measure is designed to address, it said.

Speaking to Accounting Times, BDO tax partner Mark Molesworth was asked whether the firm recommended a more succinct definition of discretionary trusts to provide more clarity.

“We have not specifically proposed a definition, but our submission focuses on the practical economic indicia of a discretionary, as opposed to a fixed, trust,” Molesworth said.

“In our view, trusts that the market economically requires to be fixed, where investors are intended to have well-defined interests, should not be caught by provisions that apply to discretionary trusts.”

Addressing unintended double taxation

A key concern identified in the submission was the treatment of distributions from discretionary trusts to companies and other trusts.

BDO cautioned that the existing framework could trigger repeated taxation of the same earnings as they circulate through complex entities, which may drive the cumulative tax burden significantly above the intended 30 per cent threshold.

The firm proposed implementing a separate minimum trust credit account mechanism that would permit recognition of these credits across various entity layers, ensuring the system remains non-refundable while upholding the integrity goals set by Treasury.

This comes after fellow submissions highlighting the same concern regarding double taxation, in which RSM warned the measure could create double taxation for corporate beneficiaries, while Wilson Asset Management argued that taxing the same dollar twice discourages investment by reducing after-tax returns.

Making transitional relief effective

BDO noted that the proposed rollover relief for taxpayers who choose to restructure out of discretionary trust arrangements may still trigger significant state and territory duty liabilities.

As such, the firm recommended that Treasury, state, and territory governments work collaboratively to ensure complementary duty relief is available.

Molesworth said: “If the government were to rely on the current definition of fixed trust (and capture all trusts that are currently non-fixed in the new proposal as a result), we expect that the commissioner of taxation will be inundated with requests for the exercise of his discretion to treat commercial investment trusts as fixed”.

“That will create unproductive work for investors, trustees, advisers and the ATO.”

Preserving tax attributes on restructure

BDO recommended that important tax attributes be preserved, including cost bases, acquisition dates, capital losses, and eligibility for small business CGT concessions.

Maintaining these attributes would help ensure the rollover functions as genuine transitional relief rather than creating new tax costs or disadvantages for affected taxpayers, it said.

BDO urged Treasury to maintain its engagement with experts and professional bodies during the refinement of these measures.

The firm emphasised that meticulous design of the framework is imperative to meeting policy goals while avoiding collateral disruptions for commercial entities, private investors, and family enterprises.