RSM urges government to consider more equitable alternative to trust tax

RSM Australia has urged the government not to proceed with its proposed minimum 30 per cent tax on discretionary trusts from 1 July 2028.

In a recent submission to Treasury, RSM Australia said the proposed trust tax changes represent a “significant and unnecessary departure from horizontal equity” and abandon the imputation system.

“The government’s stated concern about income splitting mischaracterises discretionary trusts as novel tax-planning arrangements, without regard for their genuine and lawful role in private groups that are risking family capital to generate a return for the family,” said RSM Australia.

If the government decides to proceed with the measure, RSM Australia said it should do so only in a form that corrects current design issues, such as unrelieved double taxation and the practical costs of restructuring.

“The proposed minimum tax on discretionary trusts is unnecessarily complex and causes a variety of issues in respect of trust-to-trust distributions and distributions to corporate beneficiaries,” the firm said.

“Many privately owned Australian businesses operate as an economic group through multiple trusts and corporate entities established for legitimate asset protection and risk mitigation purposes. Disrupting these existing structures which have been lawfully established, to implement a minimum tax on individual beneficiaries who receive trust income is unnecessary, costly to implement, and will cause significant disruption to privately owned businesses across Australia.”

The submission explained that the government’s policy objective – a minimum tax rate on income derived by individual beneficiaries from discretionary trusts – could be met by imposing the minimum tax at the individual beneficiary level, without taxing the trust or providing a non-refundable credit mechanism.

“Implementing the minimum tax at the individual beneficiary level would simplify the proposed changes whilst ensuring the government’s policy objective is met, consistent with the original policy position put forward in 2019 in the form of commitment PER 404,“ it said.

RSM Australia said the new minimum tax on discretionary trust distributions could be legislated in the same manner as the recently legislated minimum tax on capital gains.

“We recommend that the amount to which the minimum tax applies be calculated on an adjusted basis, so beneficiaries can benefit, in the same way as salary and wage earners, from tax-deductible donations and concessional superannuation contributions,“ it said.

“There would be no change to the general refundability of franking credits to individuals; rather, the minimum tax would prevent franking credits from being refundable to the extent of the new minimum tax.“

Under this alternative proposal, RSM said the company tax rate applicable to discretionary trust distributions received by a corporate beneficiary would remain unchanged under existing law, thereby allowing base rate entities to adopt the lower 25 per cent company tax rate.

“This is justifiable on productivity grounds, given that those base rate entities will either operate a small or medium business of their own or be integrated with a family group in which a trust operates such a business,“ the firm said.

The firm said while it understood that Treasury was concerned that the minimum tax could be sidestepped by a distribution to a corporate beneficiary, which then allows the dividends to be paid to individual shareholders without application of the minimum tax to the individual shareholder, it did not share the view that this is a material revenue risk.

“We note that if a discretionary trust has made a family trust election, it will not in most cases be able to distribute to a corporate beneficiary with shares carrying discretionary dividend access rights without the incidence of family trust distribution tax,“ the submission said.

“If the shares in the corporate beneficiary do not carry discretionary dividend access rights and are held by a discretionary trust, as would normally be the case for asset protection and estate planning purposes, the dividend when flowing through the second discretionary trust would itself give rise to the minimum tax when received by an individual beneficiary.

“If the shares in the corporate beneficiary do not carry discretionary dividend access rights and are held by individual shareholders, this should not present any material revenue concern, as the same position could be achieved if the trust assets were transferred to the company under the proposed roll-over relief.“

RSM Australia said that if Treasury remained concerned about material revenue risk, a separate class franking account could be adopted by any corporate beneficiary that receives trust income from a discretionary trust.

“To prevent recovery of the minimum tax at the individual shareholder level through refundable franking credits, the franking credits within that account would be non-refundable when dividends sourced from a discretionary trust distribution are declared to shareholders,“ it said.

“Appropriate ordering or proportioning rules would also be needed to determine the extent to which dividends are sourced from that account.“

RSM also said that a genuinely comprehensive review of trust taxation was needed, with the three-week consultation period provided by Treasury for the proposed reforms far too short.

“There should be genuine consultation with practitioners, trustees, businesses, and families who will be impacted by the practical consequences of any change. Such consultation must extend to general trust law,“ it said.

The accounting firm also urged Treasury to “meaningfully consider the submissions made earlier this calendar year by the professional accounting and tax bodies on the archaic family trust distribution tax rules, which are having significant unintended consequences for multi-generational families and may affect the viability of a sizable number of family businesses“.

“We are able to assist Treasury with real and practical examples of impacts that need to be addressed with urgency.”