Accounting firm urges rethink of ‘punitive’ trust tax proposal

In its submission to Treasury’s Minimum tax on discretionary trusts consultation paper, SW Accountants & Advisors has pointed to the need for a clearer statutory definition of “discretionary trust”, carve-outs for tax-exempt entities, the removal of the double tax on corporate beneficiaries, and workable rollover relief and state duty.

The firm indicated that several groups would be heavily impacted by Treasury's proposed changes.

Specifically, it noted that private businesses and family groups operating through discretionary trusts, particularly those with corporate beneficiaries, would be affected.

Unit trusts and other structures that are commercially ‘fixed’ but may fall within the current definition by default may also be impacted, it said, as well as charities, ancillary funds, and other income tax-exempt beneficiaries of discretionary trusts, property, investment, and testamentary trust structures, and those weighing restructures ahead of 1 July 2028.

Speaking to Accounting Times, Vanessa Priest, who is a tax partner at SW Accountants & Advisors, was asked whether the approach ultimately went too far.

“The double taxation of corporate beneficiaries is overly punitive and goes beyond the stated policy objective of ensuring that people using trusts should pay similar taxes on the same income as salary and wages earners,” Priest said.

Clients were experiencing significant apprehension in the market, she added.

“Across our client base there is so much hesitation in the market, with taxpayers not knowing how to invest, where to invest, and being unclear on what their likely after-tax returns will be.”

“There has already been an increased rate of enquiry from clients about moving money to alternative investments offshore where they would not be subject to these punitive measures.”

To address these challenges, she suggested a technical solution to maintain the tax threshold without the negative side effects of the current proposal.

“Our proposed alternative ‘restricted franking account’ approach, whereby corporate beneficiaries of discretionary trusts receive a credit for tax paid by the trustee but can’t distribute refundable franking credits, ensures that the minimum 30 per cent tax is paid without imposing double taxation on corporate beneficiaries,” Priest said.

“If this proposal is accepted, there would be limited need for rollovers, which would mitigate duty and restructuring costs and would also significantly simplify the required legislative changes.”

Addressing the specific inquiries raised during the consultative process, SW provided a concise summary of the primary recommendations toward Treasury:

A statutory definition of ‘discretionary trust’

SW submitted that there should be a purpose-built definition targeting trusts with a substantive power to redirect the economic enjoyment of income or capital between beneficiaries, with express carve-outs for managed investment trusts (MITs), attribution managed investment trusts (AMITs), and most unit trusts.

Carve-out for tax-exempt entities

SW noted that a non-refundable 30 per cent withholding on distributions to income tax-exempt entities (such as charities and ancillary funds) would, in effect, tax the exempt sector and reduce philanthropic funding by up to 30 per cent.

As such, the firm submitted that the offset should be refundable for exempt beneficiaries, or that such distributions be carved out entirely.

Remove the double tax on corporate beneficiaries

SW proposed a ‘restricted franking account’ mechanism that provides a non-refundable offset to the company and quarantines the credit, preventing it from being refunded to low-rate shareholders.

According to SW, this approach would secure the 30 per cent minimum threshold while avoiding the punitive effects of taxing income twice, significantly reducing the requirement for intricate rollover relief measures.

Workable rollover relief and state duty

If the penal treatment of corporate beneficiaries proceeds, SW warned that rollover relief will become critical.

They warned that, without matching state duty concessions, restructures could trigger duties of up to 6.5 per cent.

The firm submitted that relief should not require the transfer of all assets, and that the Commonwealth should secure aligned state duty relief or provide an income tax offset for duty paid.

Collection, lodgment and the Bendel decision

SW Accountants & Advisors recommended aligning trust and individual lodgment dates, making the trustee and beneficiary jointly and severally liable, refunding excess franking credits to the trustee, and confirmed that no further Division 7A changes were needed following the High Court’s decision in Bendel.