From July 2028, a minimum tax rate of 30% will apply to all trust distributions from discretionary trusts. Here’s what that actually means.
One of the bigger bombshells to come out of this month’s federal budget was a proposal to introduce a 30% minimum tax on discretionary trusts, which until now has been a relatively popular method for GP practices and doctors to distribute income.
The good news is that the changes won’t come in until 1 July 2028, giving doctors, accountants and lawyers alike about two years to understand what’s happening and come up with a new plan.
According to the budget documents, the new 30% minimum tax will be paid by the trustee, as that is who controls distributions.
Beneficiaries other than corporations will receive non-refundable credits for the tax payable.
The majority of income which flows through Australia’s roughly 840,000 discretionary trusts goes to the top earning 10% of families.
Approximately 90% of total private trust wealth is held by the wealthiest 10% of households.
Under the current rules, trustees pay tax on any income that is retained in the trust and pay tax on behalf of particular beneficiaries, such as children.
The trustee determines which beneficiaries are entitled to the income of the trust and the beneficiary pays tax based on that entitlement, at their marginal tax rate.
“A classic example of utilising income splitting might involve two parents and a couple of kids,” RSM Australia senior accountant Thomas Leslie told The Medical Republic.
“The kids are over 18, they’re at university, and they’re not working, so the benefit of income splitting would be to distribute income to them. The first $18,200 is tax free … and then for up to $45,000 the tax rate is … 16%.
“Let’s say mum and dad are both in the top marginal tax rate, that’s 47%.”
As long as certain criteria are met, using a family trust structure could allow the parents’ income to be distributed across family members and taxed at the lowest marginal rate.
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The new 30% minimum will essentially cancel out this effect for the bottom two tax brackets.
“If you’re an individual and your trust income is $45,000 each year … your tax is roughly $4,800 [under current rules],” Mr Leslie said.
“Whereas under the new rules, tax at 30% on $45,000 [will be] $13,500, so it’s almost a $10,000 increase in tax on $45,000.
“It’s essentially a significant increase to that minimum tax rate you’ve got to pay. It won’t impact family groups where everyone in the family is already earning more than $45,000 because they’d already be paying at least 30% tax on those trust distributions.
“But for families where maybe the partner doesn’t work or the husband or wife is taking work off to look after the kids for a few years and they were splitting investment income or profits from owning a practice, it will really hit them.”
Corporate trust beneficiaries – sometimes known as “bucket companies” – are a slightly different story.
“If the [GP] runs a practice or discretionary trust, or they hold units in a practice or a discretionary trust, and they distribute income to a corporate beneficiary, the trustee is still subject to that 30% minimum tax rate – but the corporate beneficiary isn’t eligible to claim or get a credit for the 30% tax that’s been paid on that income at the trust level,” Mr Leslie said.
“Essentially it results in almost like a double taxing of that income … the trustee pays that 30% tax and then distributes income to the bucket company, while the bucket company also pays tax on that income as well, but they don’t get the tax credit, so they’re essentially being taxed on the same amount twice.”
Given the relatively long lead time, Mr Leslie warned GPs against rushing into any major changes.
“We’ve still got to see the legislation, and it has still got to pass both houses of parliament,” he said.
