It is looking more and more certain that the federal government’s proposed 30% minimum tax on discretionary trusts will be felt across multiple professions, including general practice.
As the Department of Treasury moves to formulate a 30% minimum tax on discretionary trusts, legal and financial experts warn that the laws will have an impact far beyond the government’s stated intent of income splitting by wealthy families.
The new rules, which will apply from 1 July 2028, will see trustees pay a minimum 30% tax on the taxable income of a discretionary trust.
According to a consultation document released by Treasury, the target of the new rules is, unambiguously, income splitting.
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“Discretionary trusts allow lower tax rates to be achieved through ‘income splitting’, whereby trustees of discretionary trusts allocate all or part of their income to beneficiaries who have a lower marginal tax rate, arrangements that are not available to most workers,” the document reads.
“These arrangements can result in high-income and high-wealth taxpayers who structure their affairs using discretionary trusts, paying less tax relative to salary and wage earners on similar income levels, or paying similar tax relative to salary and wage earners on lower income levels.
“This reduces the progressivity of the tax system.”
The problem is that ‘discretionary trust’ is a broad term.
That same Treasury consultation document, which was released last month, goes on to define discretionary trusts by exclusion; i.e. every trust which is not a fixed trust (where beneficiaries hold a set, unchanging share of the trust’s income) will be considered a discretionary trust.
There are relatively few proposed exclusions.
According to recent commentary in the Australian Financial Review, even trusts which might be conventionally considered to be fixed trusts will often contain a clause allowing future amendments – thus making them a discretionary trust in the eyes of the law.
What this means on a practical level is that GPs and practices which use trusts for commercial purposes to secure payments will likely wind up paying more tax.
Many practices use so-called “bucket companies”, where money from patients goes into one big pool which is then used to pay GPs and reception staff. A fixed trust which pays doctors a percentage of their earnings can start to look, in substance, like it is making discretionary distributions.
“The argument that’s been put is, if you’re collecting on money on behalf of doctors and paying them a percentage of their gross fee, then that’s going to get caught under this legislation that they’re proposing,” David Dahm, an accountant with special interest in the GP sector, told The Medical Republic.
“That’s just unprecedented.”
Mr Dahm urged GPs who were unsure of their business structure or who believed they may be affected to get legal and financial advice.
“You need to stop commingling your banking with your service entity, particularly if it’s a trust,” he said.
“You need to have a separate bank account in a separate entity. You need to get specific advice on how to do that correctly for payroll tax and income tax purposes. Some people call them Quistclose entities.
“Make sure you’ve got those entities set up correctly, and therefore you get rid of the problem.
“But you’re going to have to do a bit of a minor restructure and get those banking flows right. And understand it does have an impact, and which is why a lot of people don’t want to change.”
