Trusts a ‘symptom’ of a broader issue: Grant Thornton calls for comprehensive tax reform

In its submission to Treasury’s Minimum tax on discretionary trusts consultation paper, the accounting firm highlighted a range of concerns with the policy, particularly regarding adding further complexity to an “already intricate tax system for trusts.”

Grant Thornton said there is a significant disadvantage for family groups that typically use corporate beneficiaries for asset protection and succession planning, which enable the future transmission of wealth to younger generations.

The firm noted that the proposed measure introduces excessive complications and risks creating several inequitable and harsh consequences for taxpayers.

Consequently, it has urged the federal government to re-evaluate the entire strategy, specifically examining the broader taxation of trusts and questioning if a minimum tax threshold would actually fulfil genuine legislative goals.

The proposed introduction of a selective minimum tax rate for capital gains and trusts in the 2026–27 federal budget is a fundamental shift that risks introducing severe complexity and unintended outcomes, and therefore requires clear policy justification and extensive public consultation before implementation. Grant Thornton recommended that separate and extensive consultation be conducted to explore the policy goal.

Alternative proposal

Grant Thornton said it understood the intent of subjecting the net income of a discretionary trust to a minimum 30 per cent tax impost, imposed on the trustee.

However, it noted that the proposed structure is unnecessarily complex, and contains punitive outcomes that are unreasonable.

Grant Thornton recommended that the minimum tax impost be structured as follows:

• It is imposed at the individual beneficiary level – and only for individuals.

• It is calculated as a “top-up” tax between the beneficiary’s marginal rate and 30 per cent if the beneficiary's marginal rate is less than 30 per cent.

Trust losses

Grant Thornton said that Schedule 2F of the Income Tax Assessment Act 1936 appropriately allowed trusts within the same family group to offset income and losses as a single economic unit, and that the proposed minimum trust tax would have undermined this policy by imposing punitive tax outcomes on ordinary commercial trust structures.

Speaking to Accounting Times, David Montani, national head of technical tax at Grant Thornton, raised concerns that the proposed changes could extend beyond their original intent and create unintended consequences for ordinary trust structures.

“If I go back to the origin of this policy, it is to reduce the ability to split income from business and savings,” Montani said.

“The point that the government said is that there is perhaps an excessive use of trusts in tax planning.”

“What I would say is that the policy is also treating symptoms rather than the underlying cause.”

Recommendation: Grant Thornton suggested that the minimum tax on trusts be waived for income distributed between entities in a single family group that have established family trust elections (FTEs) for the same test individual, thereby maintaining the established grouping protocols under Schedule 2F.

Corporate beneficiaries

Grant Thornton said that denying corporate beneficiaries a tax offset for trustee tax results in excessive double taxation, making corporate beneficiaries commercially unviable and placing small-to-medium businesses at a competitive disadvantage compared to large corporate groups.

This concern was also raised by SW Accountants & Advisors, which labelled the double taxation of corporate beneficiaries as overly punitive.

Montani questioned whether the measures were appropriately targeted and said that the issue was broader than the use of trusts themselves.

“Trusts aren’t the real issue; the underlying reason why people use trusts to a greater extent is our over-reliance on income tax; trusts are just a symptom of that,” he said.

The firm recommended changing the imputation system rather than denying corporate beneficiaries a tax offset, as this would have prevented the minimum tax from being undermined without creating unfair tax outcomes.

Restructuring obstacles

Grant Thornton noted the expanded scope of CGT roll-over, yet indicated that any CGT roll-over is ineffective if other restructure costs or obstacles make restructuring unviable.

“If businesses and private groups restructure and rearrange assets to work around the effect of this policy, the policy is achieving little more than causing private groups to incur substantial costs for no productive output,” Montani said.

Grant Thornton recommended engaging with state and territory governments to provide transfer duty relief, allowing immediate deductions for restructuring costs, and permitting partial asset transfers under the expanded CGT rollover rather than requiring all trust assets to be transferred.

Other restructuring matters

The firm also said that requiring trusts to restructure conflicted with the government’s objective of reducing red tape and suggested that alternative trust taxation models could have achieved the policy objectives without imposing significant restructuring costs.

It recommended that the government reconsider broader trust taxation proposals and introduce a beneficiary tax nomination election as an alternative to requiring costly trust restructures.

Bendel decision

The firm contended that while the Bendel ruling established that unpaid present entitlements do not constitute loans for Division 7A purposes, significant legislative ambiguity persists, particularly regarding the possible invocation of section 100A, even though Subdivision EA sufficiently addresses the associated integrity issues.

The government, it said, should introduce legislation to prevent section 100A from applying to UPEs or, alternatively, treating UPEs as loans under Division 7A for trusts subject to the proposed minimum tax.

Scope of trusts

The intended reach of the minimum trust tax was excessively wide, Grant Thornton said, catching various special-purpose and non-discretionary trusts that fall outside the targeted policy risk, particularly given that the current definition of a fixed trust remains too narrow.

It recommended refining the scope of the minimum trust tax by excluding trusts that met practical fixed trust criteria, broadening exemptions for testamentary and special-purpose trusts, carving out professional trust accounts, and introducing a de minimis income threshold.

Symptom versus cause

Grant Thornton also noted that the minimum tax on discretionary trusts is essentially treating symptoms instead of the underlying cause; that being the well-known over-reliance on income tax.

The key concern, Montani said, was a mismatch between the policy target and the broader tax issue.

“They’re attacking the symptom when the real issue underlying that is our over-reliance on income tax; that’s why the policy will add to complexity and produce punitive outcomes where there is no tax mischief. The irony is that this will encourage tax planning to mitigate those punitive outcomes,” he said.

The firm advocated a comprehensive and authentic overhaul of the taxation framework, emphasising the need for tax-mix reform as the ultimate objective.