Q: If Labor is elected, is it still planning to change to tax arrangements for discretionary trusts?
A: Yes, Labor has a significant change in mind. Under current arrangements discretionary trust income can be distributed on an entirely discretionary basis to beneficiaries who may be on different personal income tax rates.
Labor is proposing that a minimum 30 per cent tax rate be applied to discretionary trusts income distributions to anyone over the age of 18. Bill Shorten announced this policy in 2017 and it has not changed.
This policy only applies to discretionary trusts. A discretionary trust is so called because the trustee has the power to choose the amount of money that is paid to each beneficiary out of trust income. A beneficiary on a low or no income, such as a business owner’s spouse, will pay less tax on distributions than a high-income earner.
Non-discretionary trusts, such as deceased estates, special disability trusts and fixed trusts would not be affected. Nor would the policy be applied to farm trusts or charitable trusts.
Labor is not opposed to the use of trusts, which it acknowledges can be used legitimately for purposes such as asset protection, estate planning and business succession.
However, it says the tax advantages are exploited by wealthy individuals to minimise tax obligations.
It is proposing to apply its policy from 1 July this year.
In a note to clients, Minter Ellison says there could be a shift in business structures from trusts to companies, especially if the companies are eligible for the 27.5 per cent tax rate.
Companies with annual turnover of less than $25 million in 2017/18 were eligible for the 27.5 per cent income tax rate. In the current tax year, eligibility for the 27.5 per cent rate expands to include companies with turnover up to $50 million.