New trust tax draft laws released with key exemption

The Albanese government has released draft legislation for a new minimum 30 per cent tax on discretionary trusts announced in the May budget that offers an exemption for those willing to lock in a fixed structure.

The tax hit on trusts was originally forecast by Jim Chalmers to raise $44.9bn for the government over the next nine years, but on Thursday the government did not release an updated figure on that revenue forecast.

The draft legislation includes expanded options to limit or eliminate restructuring costs those using discretionary trusts, but does not fully remove the risk that trusts rolling over to another structure will have to pay stamp duty to state governments.

If they are forced to restructure their trusts in the wake of the tax changes, a multibillion-dollar fight looms over the stamp duty revenue with the states.

“We’re delivering a fairer tax system and helping fund tax cuts for workers by better aligning the tax rate on trust income with tax rates paid by workers,” Dr Chalmers said on Thursday.

The Treasurer will give a fortnight for consultation on the new legislation that will force changes for hundreds of thousands of trusts.

The new changes include a minimum 30 per cent capital gains tax and minimum 30 per cent tax on distributions within trusts.

The government said it would provide a new definition of fixed trusts to help ensure a range of commercial trust types that do not have material discretionary elements are not captured by the minimum tax.

The legislation also includes expanded rollover relief that will be available for three years from July 1, 2027 for those restructuring out of a discretionary trust into other arrangements.

A trust existing at July 1, 2028 can now elect for a fixed-distribution regime with pre-nominated beneficiaries. Opting for this will allow that trust to avoid the minimum tax without restructuring.

CPA Australia head for tax policy Jenny Wong said there were some obvious improvements to the design of the new tax, but those not electing the new fixed regime and rolled over to a new structure could still incur stamp duty.

“The election option is a genuine improvement. But if you roll over to a company you still have the stamp duty problem,” Ms Wong said.

The changes could still induce thousands of trust-holders to roll over assets into company structures that pay less tax, but in doing so could trigger stamp duty on such transactions as property, setting up a multibillion-dollar fight over the revenue with the states.

Ms Wong also said that if the trust chose to restructure, “there are still plenty of regulatory consequences”.

“The government has accepted that restructuring out of discretionary trusts requires transitional support. That is the purpose of the time-limited restructure rollover. The rollover, however, addresses only the income tax and capital gains tax consequences of a restructure. It does not address the regulatory consequences that arise when the legal person conducting the business changes.”

The legislation also makes provisions for refunds for franking credits that relate to income subject to the minimum tax.