Trust tax: the election that asks families to freeze the future

Treasury has put a price on the flexibility that made discretionary trusts popular, then offered a cheaper way to avoid paying it. The bargain is not as clean as it looks.

Under exposure draft legislation released this month, a 30 per cent minimum tax will apply to discretionary trust income from 1 July 2028.

Trusts that do not want to pay it can make a fixed entitlements election: name the beneficiaries and the fixed share of income and capital each will receive, and the trust falls outside the regime. No restructure, no stamp duty. For a settled family, it is the obvious answer.

Not every family is that settled

But as two leading advisers observe, a great many families are not that settled. The election asks them to commit to something they are not yet ready to decide.

Will Hamilton, Hamilton Wealth Partners, sees the election as an offer that solves the problems you can schedule and leaves the ones you cannot.

“I have spent forty years advising families and the risks that matter are the ones you cannot put a date on,” Hamilton says. “Someone gets sued, a marriage ends, a business needs capital in a hurry and money has to go somewhere it was never going to go. This election recognises two of those and ignores the rest.”

The list of named beneficiaries, once fixed, moves only when a beneficiary dies or the family breaks down. The election locks everything else. That is deliberate.

The minimum tax exists to curb exactly the year-by-year discretion that lets trustees spread trust income wherever it is most useful. So a list that families cannot rework each year is the mechanism, not an oversight. Hamilton’s objection is that families use the discretion for more than tax.

“The list can only change if a beneficiary dies or the family breaks down,” he says. “So what happens to a grandchild born in 2031? I have read the draft and I cannot tell you. Plenty of families set these structures up precisely to bring the next generation in over time, and they deserve an answer before they are asked to commit.”

Drafts and timelines

The May budget announced the measure. It taxes trustees at 30 per cent. Non-corporate beneficiaries who are presently entitled to income can claim a non-refundable credit.

Treasury has paired it with a three-year restructure rollover, running from 1 July 2027. It relieves the income tax cost of moving assets out of a trust. It does not relieve the stamp duty. The fixed entitlements election is the alternative on offer, and its appeal is precisely that it sidesteps both.

Hamilton gives the design credit where it earns it and then turns to the timetable. The exposure draft was open for comment from 3 to 18 September, roughly a fortnight. The government is aiming to legislate by year end.

“Taking restructuring and stamp duty off the table is a real improvement, so credit where it is due,” he says. “But two weeks of consultation on a decision you cannot reverse, with the law due before Christmas, is not enough time for anyone to think properly.”

The exclusion

The draft excludes primary production income, which has been widely read as farming families being spared.

Troy Armstrong, founder of Larapinta Private and an adviser to farming families on succession, says that reading is generous.

“Primary production income is excluded, which has been read as farming families being left alone, but the exclusion is narrower than that,” Armstrong says. “Very few farm trusts earn farm income and nothing else, and the off-farm investments, the proceeds of a paddock sold years ago, and the rent coming back from the operating entity aren’t primary production income.”

That distinction matters on the land more than almost anywhere else, because the fixed entitlements election collides with the one thing a farming family cannot schedule: who comes home.

“The fixed entitlements election is being offered as the cheap alternative to restructuring, and for a settled family it probably is, but on the land it asks you to name who gets what and then hold that list for decades,” Armstrong says. “It only changes if someone dies or a marriage ends, so it doesn’t move when a daughter comes home to run the place or a son decides he’s not coming back at all.”

The lead time is the asset

The rigidity is not equally a problem for everyone. A family whose succession is settled, whose next generation is known and whose assets are clean can make the election, save the restructuring cost and the stamp duty, and be done.

The warning bites where the shape of the next generation is still open. On the land, that is most of the time.

Armstrong’s argument is that the lead time to 2028 is the asset. Settle the succession first and the election becomes a simple piece of paperwork. Settle the structure first and it locks in an answer the family has not agreed on.

“There’s time before this starts, and families should spend it on the succession conversation rather than the structure,” he says. “Do it the other way around and you’re locking in an answer to a question nobody in the family has actually asked.”