Ref: AMK
30 July 2026
Assistant Secretary
Individuals and Indirect Tax and Superannuation Division
The Treasury
Langton Crescent PARKES ACT 2600
By Email: mintaxtrusts@treasury.gov.au
Dear Assistant Secretary
CONSULTATION PAPER: MINIMUM TAX ON DISCRETIONARY TRUSTS
We welcome the opportunity to comment on Treasury's Consultation Paper regarding the proposed minimum tax on discretionary trusts (Consultation Paper)
Pitcher Partners is an Australian advisory and accounting firm that works closely with the middle market, including private groups, family businesses and high net worth individuals. We regularly advise on complex tax issues and the practical operation of the tax system.
We highlight that for the purposes of Division 30 of the Tax Agent Services Act 2009 and, in particular, the amendments to the Code of Conduct by the Tax Agent Services (Code of Professional Conduct) Determination 2024 (Determination), all of the comments made in this submission are directly relevant to us as a firm and our clients. While this may result in a conflict of interest for the purposes of section 20 of the Determination, we highlight that we have tried to ensure that our comments and suggestions in this submission are balanced and consistent with the policy, principles and intention of the rules as we understand them.
EXECUTIVE SUMMARY
1. We understand the overarching integrity objectives of the proposal and accept this is a matter of government policy. However, we have significant concerns with the proposed minimum tax regime in its current form. We set out below an alternative that we believe would achieve Treasury’s stated objectives more simply and effectively. Indeed, it is Treasury’s interests to do so given the serious unintended consequences we believe arise.
2. The Consultation Paper demonstrates that Treasury have not properly considered the significant ramifications that this proposal will have on the Australian economy. At 30 June 2024, there were 1,062,162 trusts that lodged income tax returns 1 The majority of these would be considered ‘discretionary trusts’. This represents almost half of the entities lodging income tax returns and conducting operations (both business and investment) in Australia.
3. A minimum tax rate of 47%, that is applied to business profits and investment gains that are continuously reinvested in the economy (that is, not applied for private purposes), is likely to prompt significant behavioural responses. In our experience, businesses and larger investment groups are likely to restructure, defer investment or relocate activity in response, which may work against the policy's broader economic aims.
4. We consider that the proposed Treasury Model is more complex than is necessary to achieve the policy objectives. It would require extensive new rules dealing with trust classification, minimum tax offsets, trustee taxation, beneficiary reporting, excess franking credits, collection mechanisms, rollover relief and restructuring pathways.
5. In the absence of appropriate transitional rules for existing structures, we see a material risk that some existing Australian business and investment structures would be wound down or their assets liquidated. We are already aware of transactions where the future of existing structures is being actively reconsidered in light of the proposal, which suggests that transitional design will be critical.
6. The proposal gives rise to significant interaction issues across the existing tax system, requiring consequential amendments and integrity rules across numerous areas of the tax law. Appendix C highlights over 20 consequential interaction issues that would need to be thought through under the Treasury Model. These issues do not appear to exist under the alternative Withholding Model.
1 Taxation statistics 2023–24 Trusts: Selected items, for 1990–91 to 2023–24 income years, Table 1A.
7. In our view, the Treasury Model presents three fundamental concerns. First, the Treasury Model effectively requires widespread restructuring of existing trust arrangements. While Treasury has proposed rollover relief, many taxpayers will be unable to restructure due to significant commercial and legal impediments, including stamp duty costs, financing constraints, contractual restrictions, trust law issues and the broader costs associated with restructuring established groups. For many taxpayers, these impediments will effectively preclude entities from restructuring notwithstanding the availability of income tax relief.
8. Secondly, the Treasury Model may significantly diminish, and in some cases effectively deny, the value of existing tax losses within family trust elected groups. Absent appropriate transitional relief, the proposal would retrospective reduce or eliminate a taxpayers ability to utilise losses as original intended. Taxpayers may be subject to the minimum tax despite losses existing elsewhere within the family group, creating a real risk of double taxation and potentially preventing those losses from ever being effectively utilised.
9. Thirdly, the Treasury Model proposes a punitive treatment of distributions to corporate beneficiaries that extends well beyond the integrity concern identified in the Consultation Paper. The proposal targets distributions to corporate beneficiaries generally, irrespective of whether any indirect income splitting has occurred, and therefore captures many legitimate commercial and investment structures. In practical terms, the policy choice appears to be a revenue-raising measure, supported by the forward estimates, rather than a targeted integrity rule.
10. Targeting corporate beneficiaries through a 60% income tax rate results in double taxation. The policy rationale for this approach is misconceived. Under a corporate structure, the same commercial outcomes of asset protection and a 30% income tax rate can be achieved through a tax consolidated group comprising a head company and trust subsidiaries. It can also be achieved by operating a company owned by a discretionary trust. Both structures are acceptable under the proposed regime. Penalising legacy structures that produce the exact same economic outcome is arbitrary, inequitable and difficult to reconcile with the stated policy objective.
11. If Treasury's concern is indirect income splitting, a more appropriate approach would be to adopt character retention rule that preserves the character of discretionary distributions subject to a minimum tax as they pass through interposed entities. This would directly address the identified mischief while avoiding the significant adverse consequences for legitimate business structures, capital reinvestment and investment in Australia.
Withholding Model: A balanced and sensible alternative
12. In contrast to the Treasury Model contained in the Consultation Paper, we have outlined an alternative Withholding Model. This alternative Withholding Model would directly target discretionary distributions to individuals (i.e. income splitting), being the conduct that is said to give rise to the relevant integrity concerns, rather than attempting to classify trusts or impose a new trustee-level tax.
13. A Withholding Model would allow the tax to be paid on income that is subject to the mischief. Accordingly, it provides more flexibility to deal with the concerns outlined in this submission. As a consequence, we believe the alternative Withholding Model would achieve Treasury's stated policy objectives through a significantly simpler and more targeted framework.
14. A key advantage of a Withholding Model is that it would avoid many of the implementation, restructuring and transitional issues that arise under the Treasury Model. In particular, it removes the need for complex trust classification rules, fixed trust elections, extensive rollover relief, new collection mechanisms and many of the consequential interaction rules required under the Treasury Model. It also significantly reduces compliance costs, administrative burdens and unintended commercial consequences.
15. Furthermore, a Withholding Model can incorporate targeted exemptions that eliminate many of the interaction issues. For example, distributions of foreign source income or income subject to withholding (e.g., interest) to non-residents and distributions to taxexempt entities. As a result, the regime can be targeted at the arrangements giving rise to the identified integrity concerns without unnecessarily disrupting existing commercial, investment and cross-border tax settings.
16. We also consider that targeted reforms to existing integrity provisions dealing with corporate beneficiaries would provide a more proportionate response to identified concerns than the introduction of a broad minimum tax regime. In particular, the revised 2018-19 Budget measure should be legislated so that unpaid present entitlements owing to corporate beneficiaries are treated as Division 7A loans. This would directly address concerns regarding the retention of profits within corporate beneficiaries through an existing and well-understood integrity framework rather than introducing an entirely new layer of double taxation.
17. Overall, we consider that a proposed Withholding Model would provide a simpler, more targeted and more administratively efficient framework for addressing the policy concerns identified in the Consultation Paper. Accordingly, we respectfully request that
Treasury give serious consideration to a Withholding Model as an alternative to the proposed Treasury Model.
If Treasury proceeds with a model broadly consistent with the Withholding Model, we expect the reform would receive broad support from stakeholders and that taxpayers, advisers and industry participants would work constructively with Treasury and Government to facilitate its implementation.
Conversely, if the Treasury Model is adopted in substantially its current form, we expect significant opposition from the business and investment community given the extensive restructuring requirements, loss utilisation concerns and punitive treatment of corporate beneficiaries. We therefore strongly encourage Treasury and Government to consider the Withholding Model as the preferred pathway for reform.
As a final note, we have also published a discussion paper outlining an alternative corporate taxation model for trusts, available on our website.2 While that model is not discussed in detail in this submission, we believe it warrants serious consideration as an alternative reform pathway. In particular, it provides a framework for the gradual corporatisation of existing trust arrangements, which may assist in addressing many of the restructuring, rollover and transitional issues identified throughout this submission.
We have set out our detailed responses to the consultation questions in Appendix A We have also provided detail on our proposed alternative Withholding Model in Appendix B.
If you would like to discuss any aspect of this advice, please contact either Alexis Kokkinos on (03) 8610 5170
Yours sincerely
A M KOKKINOS Executive Director
2 https://www.pitcher.com.au/insights/alternative-trust-reform-proposals/
APPENDIX A – RESPONSE TO TREAUSURY QUESTIONS
INTRODUCTION
Overview
18. This Appendix responds to the 17 consultation questions contained in Treasury's Minimum Tax on Discretionary Trusts: Consultation Paper dated 8 July 2026 (Consultation Paper). Where relevant, our responses compare the proposed minimum tax regime described in the Consultation Paper (Treasury Model) with the alternative withholding framework outlined in Appendix B (Withholding Model)
19. In summary, we consider that the Treasury Model adopts a fundamentally more complex approach than is necessary to address the policy concerns identified in the Consultation Paper. The Treasury Model would require the introduction of extensive new rules dealing with trust classification, minimum tax offsets, trustee taxation, corporate and trustee beneficiaries, excess franking credits, collection mechanisms, rollover relief and restructuring pathways.
20. By contrast, the proposed alternative Withholding Model directly targets discretionary distributions, being the conduct that is said to give rise to the relevant integrity concerns. As a consequence, the Withholding Model can achieve the stated policy objectives in a significantly simpler and more targeted manner, while reducing compliance costs, restructuring requirements, administrative burdens and unintended commercial consequences.
21. We expect that many taxpayers would regard such an approach as preferable given its reduced complexity, lower compliance costs and more limited impact on existing commercial structures. Accordingly, we respectfully request that Treasury give serious consideration to the Withholding Model as an alternative means of achieving its stated policy objectives.
Corporate beneficiaries
22. Although the Consultation Paper does not raise a specific question on the treatment of corporate beneficiaries, we consider this issue to be sufficiently important to address upfront.
23. The Treasury Model appears to make a deliberate policy choice to penalise distributions to corporate beneficiaries on the basis that those distributions may facilitate indirect income splitting through the use of refundable credits. We accept that
this is the integrity concern being targeted. However, in our view, the proposed response is overbroad and disproportionate, as that concern can be addressed without imposing double taxation or penalising legitimate commercial and investment structures.
24. The Consultation Paper includes an example in which a trust distribution to a corporate beneficiary results in an effective 60% tax outcome. In our view, this produces double taxation. While the measure appears to be framed as a response to indirect income splitting, that concern can be addressed without imposing double taxation or adopting measures of this severity.
25. We understand that a further rationale for the proposed treatment may be that trusts should not be able to access the corporate tax rate while retaining the broader advantages of a trust structure. If that is the policy rationale, we consider it to be misconceived.
26. From 1 July 2027, trusts will no longer have access to the CGT discount. Accordingly, the relevant advantages of a trust structure will be limited principally to asset protection and the ability to distribute within family trust elected groups, including to utilise losses within those groups.
27. However, comparable outcomes can be achieved under corporate structures that appear to be acceptable under the proposed regime. For example, a business could be operated through a company owned by a discretionary trust, allowing profits to be accumulated at the corporate tax rate while retaining asset protection, trust ownership, and the ability to distribute dividends when required to beneficiaries. Similarly, a tax consolidated group could be established with a head company and trust subsidiary entities, allowing profits and losses to be grouped within the corporate structure while individual projects are isolated in separate trust entities for asset protection purposes. In addition, the sale of shares in the company under either structure may attract the CGT discount and capital gains to the trust.
28. These structures appear to be permissible under the proposed regime. They can deliver asset protection, facilitate group loss utilisation and allow income to be taxed at the corporate rate. In substance, they achieve the same commercial and tax outcomes as many existing trust structures involving corporate beneficiaries. Going forward, many taxpayers will likely operate through these structures. Importantly, they give rise to little, if any, additional integrity concern to the tax system
29. Accordingly, in that context, it is difficult to justify imposing a 60% tax outcome on legacy structures where comparable structures producing the same economic outcome would be permitted under the new system. Continuing with this approach would
penalise legitimate business and investment structures on a basis that is arbitrary, inequitable and difficult to reconcile with the stated policy objective. It is also likely to be perceived as a revenue measure directed at taxpayers who are unable to restructure, rather than as a targeted integrity rule.
30. We therefore consider that the proposed policy position should be reconsidered. In our view, corporate beneficiary distributions are more appropriately addressed through Division 7A. The ATO statistics indicate that unpaid present entitlements have remained broadly static since 2009, when the ATO commenced treating such entitlements as loans.3 This suggests that, where Division 7A issues are properly addressed, distributions to corporate beneficiaries do not present the integrity concern assumed by the Treasury Model.
31. We therefore request that Treasury revisit this aspect of the proposal, as it is likely to have severe economic consequences for legitimate groups that reinvest profits in their businesses and investments, rather than using those amounts for private purposes.
MINIMUM TAX DESIGN
Question 1: How should discretionary trusts be defined to appropriately distinguish them from fixed trusts for the purposes of the minimum tax?
The Withholding Model
32. Under the Withholding Model, we do not believe it is necessary to distinguish between fixed trusts and discretionary trusts. Instead, the regime would apply to discretionary or “effectively discretionary” distributions, rather than trust classifications. Accordingly, there would be no need to define a fixed trust, distinguish between fixed and discretionary trusts, or introduce a fixed trust election regime.
Difficulties with the Treasury Model
Determining a fixed trust
33. If Treasury proceeds with the Treasury Model, defining an appropriate boundary between fixed and discretionary trusts will be critical. In our view, reliance on the existing fixed trust concepts in Schedule 2F of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) is likely to result in many ordinary commercial unit trusts being classified as discretionary trusts for the purposes of the regime.
3 Taxation statistics 2023–24 Trusts: Selected items, for 1990–91 to 2023–24 income years, Table 1A.
34. The concept of a fixed trust in Schedule 2F has proven contentious in practice. Courts have adopted a narrow interpretation of vested and indefeasible interests, with the result that many ordinary commercial trusts may not satisfy the statutory requirements. While PCG 2016/16 provides an administrative safe harbour, it is a self-assessment concession and was not designed to determine liability for a trustee-level tax.
35. We also note that the Consultation Paper proposes an exclusion for widely held trusts. However, under Schedule 2F a widely held trust is itself defined by reference to a fixed trust concept. This highlights some of the practical difficulties that arise where the operation of the regime depends upon trust classification.
36. For these reasons, we consider that attaching the regime to a discretionary distribution, rather than attempting to classify trusts, is a simpler and more workable approach. This is one of the principal advantages of the Withholding Model.
Fixed Trust Election
37. We acknowledge that a fixed trust election may appear attractive. However, such an election would itself introduce a number of design and interaction issues.
38. First, Treasury would need to determine whether the election applies solely for the purposes of the Treasury Model or more broadly across the income tax law. A minimum tax-only election is likely to create interaction issues and potential inconsistencies with existing provisions.
39. Secondly, different considerations arise depending on whether the trust has identifiable economic owners. For example, unit trusts may naturally experience changes in economic ownership over time, whereas discretionary trusts generally do not. A single election framework may therefore be difficult to apply consistently across different trust structures.
40. Thirdly, a fixed trust election may give rise to difficult trust law issues. For example, a trust deed may require income to be distributed to beneficiaries who are not the deemed entitlement holders under the election, including where a default beneficiary clause operates.
41. Accordingly, we consider that a deemed fixed trust election could itself become complex and create a risk that trustees inadvertently fail to comply with the elected entitlement framework.
42. If Treasury nevertheless adopts a fixed trust election, we consider that any distribution made outside the elected entitlements should simply be treated as a discretionary distribution and subject to the minimum tax rules. In our view, this outcome is
conceptually consistent with the policy objective and considerably easier to accommodate under the Withholding Model than under the Treasury Model.
Example
Assume a trust has net income of $150. Following a fixed trust election, $90 is distributed in accordance with the elected fixed entitlements and $60 is distributed using the trustee's discretionary powers. Under this approach, only the $60 discretionary distribution would be subject to the minimum tax regime. Accordingly, minimum tax of $18 would arise (30% × $60), with the relevant beneficiaries receiving a corresponding nonrefundable tax offset. The remaining $90 would not be subject to the minimum tax because it was distributed in accordance with the elected fixed entitlements.
Certain entities such as professional practices
43. There are trust structures that are effectively fixed that operate through discretionary trusts. For example, professional practices. These entities fix distributions based on a point system that is allocated to participants at the start of each income year. The allocation is not based on the streaming of income.
44. There are complexities in running these businesses within a corporate structure, where provisions such as ‘market value’ substitution provisions and no-goodwill partnership can apply to shares in the company. Such interaction issues do not occur under a ‘point system’ discretionary trust.
45. These issues have been partly acknowledged historically by the ATO in Taxation Determinations such as TD 2011/26W titled “if a share in a 'no goodwill' incorporated professional practice is disposed of for no consideration, will the Commissioner accept, for the purposes of calculating the market value of the share upon a possible application of subsection 116-30(1) of the Income Tax Assessment Act 1997 that the goodwill of the company can be taken to have no value?”.
46. It is noted that the Taxation Determination was withdrawn and replaced with an administrative treatment,4 as the existing provisions may not properly accommodate for these structures.
4 See https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/income-anddeductions-for-business/professional-firms/acquisitions-and-disposals-of-interests-in-no-goodwillprofessional-practices#ato-Administrativetreatment).
47. Due to the complexities of restructuring these businesses, and given the fact that they are not used to provide discretionary distributions, we request that such trusts be considered ‘fixed’. That is, to the extent that the ‘interest’ held in the trust is set for an income year, where the beneficiary is not the controller of the trust, and such interest was not adjusted due to a tax characteristics of the beneficiary. In such cases, this would provide an appropriate flow-through for trusts that are effectively fixed for income tax purposes.
Question 2: What is the appropriate minimum tax treatment for income tax-exempt entities?
48. Income tax-exempt entities should be excluded from the regime. As tax-exempt entities do not derive a tax benefit from income splitting, their inclusion would introduce complexity without advancing the underlying policy objective.
49. We also note that discretionary trusts are already able to make gifts to many income tax-exempt entities (as gift deductible recipients). Absent an exclusion, materially different outcomes could arise depending on whether the trust makes a deductible gift or distributes trust income. Further, not all income tax-exempt entities are deductible gift recipients. Accordingly, excluding distributions to income tax-exempt entities from the minimum tax regime would produce a more neutral and equitable outcome.
Question 3. Are there any other implementation matters not addressed in this paper that should be considered in designing the minimum tax on discretionary trusts?
The Withholding Model
50. Many of the implementation issues identified below arise because of the design of the Treasury Model. By contrast, the Withholding Model should not require trust classification rules, widespread restructuring, a minimum tax offset regime or many of the interaction rules discussed below. Accordingly, we expect implementation costs and compliance burdens under the Withholding Model to be materially lower.
Difficulties with the Treasury Model
Treatment of tax losses within family trust elected groups
51. Treasury must ensure that the introduction of the Treasury Model does not prevent family trust elected groups from utilising existing tax losses that have arisen under the current law. This is a critical design and transitional issue.
52. Many family groups have structured their affairs, incurred losses and maintained family trust elections on the basis of the existing rules governing the use of losses within
family groups. Those losses should not be rendered less valuable, or effectively unusable on implementation of the new regime. Doing so could effectively result in many groups not being in an economic position to fund their tax liability on a group basis.
53. Clear transitional rules are required to ensure that groups with existing tax losses are able to utilise those losses in a practical and effective manner with a family trust elected group. Without such rules, the Treasury Model will give rise to double taxation. This could occur where income is subject to the 30% minimum tax notwithstanding that existing losses within the family trust elected group would otherwise have been available to shelter that income under the current law. The economic effect would be that the group is taxed on income that would otherwise have been offset by existing losses, while the value of those losses is preserved only in a theoretical or delayed sense.
Example
Assume Trust A has carried forward tax losses of $1 million and Trust B derives $1 million of income. Both trusts are within the same family trust elected group. Under the existing law, the group may have expected to utilise those losses within the family group over time. If, under the Treasury Model, Trust B is required to pay $300,000 of minimum tax before the economic benefit of Trust A’s losses can be realised, the group suffers an immediate tax cost notwithstanding the existence of offsetting losses within the family trust elected group. If those losses are later used against other income, the group may still have suffered an inappropriate timing and cashflow cost. If they cannot be effectively used, the result is a permanent double taxation outcome.
54. This can be addressed as part of the design of the Treasury Model. Transitional rules should ensure that existing losses within family trust elected groups can be utilised before the minimum tax applies in a way that produces an additional tax impost. This is not merely a compliance matter or a secondary interaction issue. It is fundamental to the fairness of the regime and to ensuring that the Treasury Model does not retrospectively erode the value of tax attributes that arose under the current law.
55. The continued transitional use of trust losses will be particularly critical where trusts are unable to restructure due to cost impediments such as stamp duty. Identifying such trusts and providing appropriate transitional relief will be critical.
Present Entitlements and Trust Deeds
56. Under the Treasury Model, beneficiaries may remain presently entitled to the gross trust income under the trust deed notwithstanding that the trustee has paid the 30% minimum tax. Addressing this issue may require trust deed amendments, which may not always be possible or may give rise to legal, tax or duty consequences. This issue should not arise under the Withholding Model, where tax is paid on behalf of the beneficiary rather than imposed on the trustee.5
Example
Assume a trust derives $100 of net income and the trust deed requires all income to be distributed to a beneficiary. Under the Treasury Model, the trustee is liable for $30 of minimum tax, leaving only $70 available for distribution. However, the beneficiary may remain presently entitled under the trust deed to the full $100 amount. This creates a mismatch between the trust law entitlement and the economic outcome unless the trust deed is amended or specific legislative rules modify the beneficiary's entitlement.
Medicare Levy
57. The Consultation Paper states that the minimum tax offset cannot be used to reduce Medicare Levy liabilities on the basis that this is consistent with other tax offsets. However, this is not correct.
58. For example, items 21 and 22 in the table in s 63 10(1) of the Income Tax Assessment Act 1997 (Cth) permit the foreign income tax offset, and the veterans' superannuation (invalidity pension) tax offset to be applied against Medicare Levy liabilities. Whether the minimum tax offset can be applied against Medicare Levy is therefore a policy choice rather than a matter of consistency.
59. If the offset cannot be applied, many beneficiaries will effectively be subject to a combined tax burden of approximately 32%, rather than the stated 30% minimum tax.
Existing Tax Attributes and Credits
60. The Treasury Model will require interaction rules dealing with tax attributes and offsets that currently flow through trusts, including foreign income tax offsets and Early Stage
5 See, for example, s 12A 215(4) and (5) of Schedule 1 to the Taxation Administration Act 1953 (Cth), which provides a legislative mechanism for amounts withheld and remitted to the Commissioner to reduce amounts otherwise payable to a beneficiary.
Investor Company (ESIC) offsets. Treasury will need to determine whether, and to what extent, those amounts are taken into account in calculating the trustee's minimum tax liability.
Non-Resident Beneficiaries
61. Treasury should also give further consideration to the treatment of non-resident beneficiaries. In particular, clarification is required regarding the interaction of the proposed regime with dividend, interest and royalty withholding tax, MIT withholding tax under Subdivision 840 M, and the existing rules in sections 98, 98A and 98B of the ITAA 1936.
62. Treasury should also ensure that the regime does not result in foreign source income that is currently outside Australia's tax base becoming subject to a 30% minimum tax merely because it passes through a discretionary trust.
Example
Assume a discretionary trust derives $100 of foreign source dividend income that would not ordinarily be subject to Australian tax when distributed to a non-resident beneficiary. If the Treasury Model applies a 30% minimum tax merely because the income passes through a discretionary trust, the foreign source income may effectively become subject to Australian tax despite otherwise being outside Australia's tax base.
63. Similarly, as a trust is flow through, imposing a 30% minimum tax on withholding income (such as ‘interest income’ distributed to a non-resident) may be inconsistent with a tax treaty.
Example
Assume a discretionary trust derives $100 of Australian source interest income and distributes that amount to a non-resident beneficiary. Under the applicable tax treaty, Australia is only permitted to tax the interest at 10%. Under the ordinary rules, Australia would collect $10 of interest withholding tax. However, if the Treasury Model imposed a 30% minimum tax on the same amount, Australian tax would increase to $30. It is therefore unclear how the regime would operate consistently with a treaty that limits Australia's taxing rights to 10%.
64. Treasury should also ensure that the regime does not result in foreign source income that is currently outside Australia's tax base, or income subject to withholding rules,
becoming subject to a 30% minimum tax merely because it passes through a discretionary trust. As outlined earlier, these issues would not occur where a Withholding Model is used (as it could allow for such distributions to be excluded).
Existing Exemption Regimes
65. Further consideration should be given to the interaction of the Treasury Model with NANE income under Subdivision 768 A and section 23AH, as well as conduit foreign income under section 802 17.
66. In particular, Treasury should ensure income that is currently exempt, non-assessable non-exempt, or otherwise outside Australia's tax base, does not inadvertently become subject to the minimum tax regime.
Example
Assume a discretionary trust derives $100 of foreign income that is currently non-assessable non-exempt income under Subdivision 768-A. If the Treasury Model applies a 30% minimum tax to the distribution of that amount, income that is presently exempt from Australian tax could become indirectly subject to tax through the operation of the minimum tax regime.
Existing Integrity Regimes
67. Treasury should also consider the interaction of the Treasury Model with existing integrity provisions, including Family Trust Distribution Tax and Division 6D. Where those provisions already impose specific tax outcomes, it will be necessary to determine whether the 30% minimum tax applies in addition to, or instead of, those regimes.
68. These issues illustrate a broader concern with the Treasury Model. Because the proposal imposes a new trustee-level tax, it requires interaction with numerous existing provisions throughout the tax law. By contrast, the Withholding Model is directed at discretionary distributions themselves and therefore requires significantly fewer consequential amendments and interaction rules.
ROLL-OVER RELIEF
Question 4: Are the proposed rollover relief arrangements appropriate?
69. We do not consider the proposed rollover relief arrangements to be an appropriate solution. The relief is directed at addressing issues that arise due to the design of the Treasury Model itself
70. In practice, many taxpayers will be unable to restructure notwithstanding the availability of rollover relief. Constraints may arise from stamp duty, financing arrangements, contractual restrictions, trust law considerations, legal and accounting costs, and broader commercial factors. As a consequence, the availability of rollover relief is unlikely to provide a practical pathway for many affected taxpayers.
71. Accordingly, we strongly recommend that Treasury reconsider the design of the proposed minimum tax regime. In our view, a targeted Withholding Model would address the stated integrity concerns without requiring widespread restructuring or the extensive transitional relief contemplated by the Treasury Model.
72. Please refer to our response to Question 7 for an outline of concerns with the proposed rollover and suggested modifications that should be considered.
Question 5. Are existing integrity rules sufficient to address arrangements that substantially preserve discretionary economic outcomes through alternative legal structures?
Unfair and inequitable outcomes under the Treasury Model
73. We have not responded to this question directly. However, we reiterate that the Treasury Model, through its reliance on a non-refundable tax offset, applies integrity outcomes in a range of circumstances that do not give rise to genuine integrity concerns. For example, trust-to-trust distributions within family groups may be adversely affected notwithstanding the absence of any avoidance purpose.
74. Accordingly, we consider that the Treasury Model is likely to result in unfair and inequitable outcomes for taxpayers with existing arrangements that cannot be restructured, or cannot be restructured without significant legal, tax or commercial consequences.
Alternative Withholding Model
75. We again encourage Treasury to consider the alternative Withholding Model. Unlike the Treasury Model, the Withholding Model can address integrity concerns through targeted rules directed at arrangements that preserve discretionary economic
outcomes, without requiring complex trust classification rules or extensive integrity provisions.
Integrity Rule 1: Effectively Discretionary Distributions
76. For direct distributions, integrity concerns can be addressed by treating effectively discretionary distributions as discretionary distributions. This would help counter arrangements where fixed entitlements are used to replicate discretionary economic outcomes.
77. For example, this could apply where a trust has multiple classes of interests that distribute sequentially by reference to specified thresholds or tax outcomes. Although legally structured as fixed entitlements, the economic effect remains substantially discretionary.
Example
A unit trust derives $500,000 of net income and has four classes of units on issue. Under the trust deed, the holder of the Class A units is entitled to the first $80,000 of trust income, the holder of the Class B units is entitled to the next $80,000, and the holder of the Class C units is entitled to the following $80,000.
The holder of the Class D units is entitled to all remaining trust income. If the holders of the Class A, B and C units are individuals and the holder of the Class D units is a low-taxed entity, the arrangement effectively directs $80,000 to each individual beneficiary and the balance of $260,000 to the low-taxed entity. Although each beneficiary holds fixed entitlements under the trust deed, the economic outcome substantially replicates that of a discretionary trust distribution.
Integrity Rule 2: Character Retention Rule
78. For indirect distributions, integrity concerns can be addressed through a character retention rule. Where income is derived from an effectively discretionary distribution, that income would be regarded as ‘discretionary trust’ income and would retain its character as it passes through interposed trusts, companies or other entities.
79. Where ‘discretionary trust’ income is distributed to a fixed trust, all income and gains derived by that trust during that year of income would be treated as being subject to the minimum tax provisions. Similarly, where ‘discretionary trust’ income is distributed to a company, the company's would apply a minimum tax offset when dividends are subsequently paid by the company. This would not require complex franking accounts
to be maintained. For example, a FIFO approach could be adopted which would be simple to administer and would ensure that the discretionary trust distribution retains its character as it flows through the trust
Example – FIFO approach
A discretionary trust distributes $100,000 of income to a company. The company pays corporate tax of $30,000 and therefore derives $70,000 of after-tax profits. Under a FIFO approach, the first $70,000 of dividends paid by the company would be treated as funded from discretionary trust distributions and would therefore remain subject to the minimum tax nonrefundable offset rules in the hands of the shareholder. The shareholder receiving the dividend would receive a ‘tax offset’ equal to the tax paid on the trust income. No franking credits would be received for the tax payable on that income.
Once the $70,000 has been distributed, subsequent dividends would be treated as being paid as franked dividends
Existing Legislative Precedent for these Integrity Rules
80. These integrity concepts proposed are not novel. A similar anti-streaming method has been adopted in the AMIT regime (see s 276-210(4)). Similarly, a comparable character retention concept exists within the superannuation provisions, where income may be treated as non-arm's length income where it is derived from a discretionary trust distribution through an interposed unit trust (see s 295-550(4) and (5)).
81. Accordingly, the integrity measures proposed under the Withholding Model can be founded on existing legislative principles and should provide a practical and effective means of addressing arrangements that preserve discretionary economic outcomes through alternative legal structures.
Questions 6. Is it appropriate that the rollover is designed to prevent FTDT from applying where a discretionary trust with an existing family trust election and/or interposed entity election(s) transfers property to an entity that is not a member of the family group?
82. To the extent that taxpayers are required to restructure existing arrangements in response to the Treasury Model, FTDT should not arise merely because those restructures are undertaken to comply with legislative changes.
Question 7. Are there any other matters that should be considered in finalising the design of the rollover relief?
The Withholding Model
83. We highlight that the alternative Withholding Model should not require taxpayers to restructure their existing affairs. Accordingly, the rollover issues discussed below are substantially less significant under the alternative framework proposed in this submission.
Subdivision 122-A Rollover
84. We consider that Treasury should give primary consideration to adapting existing rollover relief, rather than developing an entirely new regime from first principles. In particular, Subdivision 122-A already provides an established rollover mechanism for many trust restructures involving the transfer of assets to a wholly-owned company.
85. Subdivision 122-A is a familiar and well-understood framework that has operated successfully for many years. It already accommodates many of the restructures that taxpayers are likely to undertake in response to the Treasury Model and is sufficiently flexible to facilitate both the transfer of individual assets and the transfer of entire businesses or groups of assets to a wholly-owned company. Accordingly, it provides a practical and logical foundation for any transitional relief regime.
Expand Subdivision 122-A to revenue assets
86. In our view, the principal limitation of Subdivision 122-A is not the structure of the rollover itself, but rather its inability to accommodate certain asset types. While rollover relief may be available for CGT assets and depreciating assets, it does not generally extend to revenue assets or trading stock.
87. We recommend that Treasury focus on extending Subdivision 122-A to revenue assets and trading stock, rather than designing a bespoke rollover mechanism to address that issue. We understand that there are also interaction issues with depreciable assets,6 which could also be addressed through this mechanism.
Example
Assume a trust carries on a business with trading stock worth $5 million and goodwill worth $2 million. While rollover relief may be available for the goodwill, no equivalent relief may be available for the trading stock under
6 It is understood that the existing rollover provided inflates the cost setting amount for shares and depreciable assets subject to the rollover.
Subdivision 122-A. As a result, a restructure that is intended to be taxneutral could trigger substantial taxable income merely because part of the business consists of revenue assets rather than CGT assets.
88. Even if such relief were available only for a transitional period, it would substantially reduce the complexity associated with restructuring and allow taxpayers to utilise an existing and well-understood rollover framework.
Commercial considerations
89. Consideration should also be given to non-income tax and commercial barriers to restructuring. While stamp duty relief is not within the control of the Federal government, other commercial issues can be addressed through this package.
90. This includes: (a) providing a deduction for restructuring costs incurred as a response to the measures; and (b) preserving or carrying tax losses into the restructured entity.
91. We note that there are other important issues that will arise in relation to restructuring, including difficulties in refinancing, potential breaches of financial covenants, contractual restrictions, employee transfers, CGT discount issues and trust deed constraints. In many cases, these matters are likely to represent more significant barriers to restructuring than the income tax consequences alone.
CGT interaction issues
92. The proposed commencement date for the rollover may create unintended interactions with the 1 July 2027 deemed disposal and reacquisition rules. As drafted, taxpayers may be unable to restructure before the deemed disposal occurs, and a subsequent rollover could crystallise deferred gains arising from that deemed disposal.
93. Treasury should therefore ensure that rollover relief applies to both the restructuring gain and any deferred gain brought to account on the restructure. Alternatively, taxpayers should be permitted to access the rollover before 1 July 2027.
94. Consideration should also be given to preserving the benefit of the pre-1 July 2027 CGT discount component held in a trust, as the loss of those benefits may discourage taxpayers from transitioning to corporate structures.
Example
Assume a trust holds CGT assets with an unrealised gain of $10 million. Under the Treasury Model, the trust is deemed to dispose of and reacquire the assets on 1 July 2027, resulting in a deferred gain. The trustee subsequently undertakes a rollover restructure in 2028. Unless the
rollover relief specifically accommodates the deferred gain created by the 1 July 2027 rules, the restructure could trigger taxation of amounts that were intended to remain deferred.
All asset approach versus single assets
95. We are unclear why the proposed restructuring rules require an “all asset” approach. This requirement may be commercially impractical, particularly where significant duty, financing, contractual or regulatory consequences arise in respect of particular assets.
96. We note that Subdivision 122-A does not require all assets of a trust to be transferred. Taxpayers can transfer individual assets, groups of assets or entire businesses depending on their particular circumstances. In our view, any transitional rollover should adopt a similarly flexible approach rather than requiring all trust assets to be transferred as a precondition to relief.
Question 8. Are there other approaches that could reduce the need for upfront restructuring? What practical or legal considerations would arise in implementing these approaches, including their interaction with trust law and trustees’ obligations?
97. We believe the preferred solution is to avoid the need for restructuring altogether through the alternative Withholding Model proposed in this submission. The Withholding Model directly addresses discretionary income splitting without requiring taxpayers to undertake extensive legal and commercial restructures.
98. As noted throughout this submission, restructuring existing trust arrangements may involve significant legal, tax and commercial impediments, including stamp duty costs, trust deed constraints, financing restrictions, contractual issues, CGT consequences and interactions with existing integrity regimes. These difficulties arise because of the design of the Treasury Model rather than any underlying integrity concern.
99. By contrast, the Withholding Model can operate within existing trust structures and therefore substantially reduces the need for transitional relief, rollover provisions, trust deed amendments and other restructuring measures. It also avoids many of the trust law and trustee obligation issues that may arise where trustees are required to alter longstanding trust arrangements in response to the Treasury Model.
100. Accordingly, we consider that the most effective way to reduce the need for upfront restructuring is not to expand restructuring concessions, but rather to adopt a model that does not require restructuring in the first place. The Withholding Model achieves the policy objective of limiting discretionary income splitting while avoiding many of the practical and legal difficulties associated with the Treasury Model.
EXCESS FRANKING CREDITS
Question 9. Having regard to tax system integrity, compliance costs and administrative simplicity, should excess franking credits be refundable to the trustee? Why or why not?
101. This issue can be addressed by flowing through the franking credit to the beneficiary and deeming the tax paid by the trustee to be the greater of the franking credit attached to the distribution and the minimum tax otherwise payable in respect of that income.
102. This option would remove refundability concerns without denying beneficiaries the benefit of franking credits. It would also avoid the need for complex carry-forward rules, tracing accounts or separate excess franking credit regimes.
Example – Beneficiary taxed at 47%
Assume a trust receives a fully franked dividend comprising $70 cash and a $30 franking credit, resulting in $100 of grossed-up income. The trust also has a carried-forward loss of $20, leaving $80 of income subject to the minimum tax. At a 30% rate, the minimum tax would ordinarily be $24. No tax is paid by the trustee, as the amount is less than the franking credit.
Under the proposed approach, the amount of tax treated as having been paid by the trustee would be the greater of the franking credit ($30) and the minimum tax otherwise payable ($24). Accordingly, the trustee would be treated as having paid $30 of tax.
If the $80 of income is distributed to an individual beneficiary on a 47% marginal tax rate, the beneficiary's tax liability would be $37.60. As $30 is treated as having already been paid, the beneficiary would only be required to pay a further $7.60.
Example – Beneficiary taxed at 35%
Assume the same facts, except the beneficiary is taxed at a 35% marginal tax rate. The trustee would again be treated as having paid $30 of tax, being the greater of the franking credit ($30) and the minimum tax otherwise payable ($24).
If the $80 of income is distributed to the beneficiary, the beneficiary's tax liability would be $28. As $30 is subject to a non-refundable offset, no further tax would be payable. However, because the offset is nonrefundable, the excess amount of $2 would be forfeited.
103. In our view, this approach provides a practical mechanism for recognising franking credits within the minimum tax framework while avoiding the complexity associated with refundable credits, carry-forward entitlements and separate integrity measures.
Question 10. What compliance costs or tracing requirements may arise under a carryforward model? Could existing integrity rules adequately address these matters?
104. A carry-forward model would introduce significant tracing obligations, record keeping requirements and integrity rules. Trustees, beneficiaries and the ATO would be required to track excess amounts over extended periods and determine how those amounts are utilised in future years. This would increase compliance costs and administrative complexity.
105. Additional integrity rules would also be required to address changes in ownership, trust restructures, beneficiary changes, distributions through interposed entities, mergers, demergers and other transactions that may affect the utilisation of carry-forward balances. These issues would significantly increase the complexity of the regime.
106. As outlined in response to Question 9, this issue can instead be addressed by providing a proportionate exemption for certain amounts and deeming the tax paid by the trustee to be the greater of the franking credit attached to the distribution and the minimum tax otherwise payable in respect of that income.
107. This approach would eliminate the need for carry-forward amounts and therefore avoid the associated tracing obligations, record keeping requirements and integrity rules. In our view, it represents a simpler and more administratively efficient solution while still ensuring beneficiaries receive appropriate recognition for franking credits.
Question 11. Are there any other matters that should be considered when finalising the treatment of excess franking credits?
108. The need to create a separate excess franking credit regime highlights the underlying complexity of the Treasury Model. In our view, the policy objective should be achieved in a manner that avoids the creation of entirely new franking credit regimes, carryforward mechanisms and associated integrity rules wherever possible.
109. Treasury should also consider that similar issues arise in relation to other tax attributes and credits that may flow through trusts, including foreign income tax offsets (FITOs), Early Stage Investor Company (ESIC) offsets and other comparable tax offsets that flow through a trust. If the Treasury Model is adopted, it will be necessary to determine how these amounts interact with the minimum tax regime and whether separate carryforward, refundability or integrity rules are required in each case.
110. These interaction issues are likely to add significant complexity to the proposed regime. In particular, Treasury would need to develop detailed rules governing the preservation, utilisation and transfer of credits and offsets through trusts and other interposed entities, together with corresponding integrity provisions.
111. By contrast, a Withholding Model that permits relevant non-refundable credits to flow through to beneficiaries would significantly reduce the need for separate tracing regimes and bespoke interaction rules. More broadly, Treasury should seek to minimise the number of new credit, offset and tracking regimes created as part of the reforms and instead leverage existing mechanisms wherever possible.
COLLECTION MECHANISMS
Question 12. What additional safeguards, administrative modifications, or beneficiary notification requirements should be considered to support the effective operation and collection of the minimum tax, particularly for arrangements involving corporate trustees?
The Withholding Model
112. These issues become substantially simpler under the Withholding Model. Existing trust tax returns already accommodate trustee-level tax liabilities, including liabilities arising under section 98 of the Income Tax Assessment Act 1936 (Cth). Accordingly, the collection mechanism could largely be implemented through existing administrative processes rather than requiring an entirely new reporting and collection framework.
113. As a consequence, there should be limited need for additional safeguards, beneficiary notification requirements or administrative modifications beyond those already associated with existing trustee assessment and withholding regimes.
Difficulties with the Treasury Model
114. By contrast, the Treasury Model would require the creation of an entirely new trusteelevel tax regime. This may necessitate a different style of tax return, additional reporting obligations, beneficiary disclosure requirements, collection mechanisms and integrity rules to ensure that beneficiaries are appropriately informed of the amount of minimum tax paid and the extent to which associated offsets are available.
115. Treasury would also need to consider how the minimum tax liability interacts with existing trustee and beneficiary taxation rules. In particular, if beneficiaries remain presently entitled to trust income under the trust deed, despite the trustee having paid the minimum tax, additional rules may be required to determine how the tax is recognised and credited to beneficiaries. These issues arise because the Treasury
Model imposes a new trustee-level tax that does not fit neatly within the existing trust taxation framework.
Question 13. What notification arrangements would be most effective for trustees and beneficiaries to give effect to the minimum tax in a way that minimises compliance costs?
The Withholding Model
116. Under the Withholding Model, there should be limited need for additional reporting obligations. The existing trust taxation system already accommodates trustee assessments and trustee taxation under provisions such as section 98 of the Income Tax Assessment Act 1936 (Cth) without requiring a separate dividend-style statement regime.
117. Accordingly, the Withholding Model could largely operate through existing trust tax return and beneficiary reporting mechanisms, thereby minimising compliance costs and administrative complexity.
Difficulties with the Treasury Model
118. By contrast, the Treasury Model is likely to require new beneficiary notification systems. Beneficiaries may need to be provided with information regarding minimum tax paid, minimum tax offsets and the utilisation of any carry-forward amounts or other tax attributes. This would create additional compliance obligations for trustees and increase administrative complexity.
119. Treasury should also consider the interaction of the proposed regime with the PAYG instalment system. To the extent that a trustee is liable to PAYG instalments in respect of income that has already been subject to the minimum tax, consideration should be given to ensuring that the same income is not reflected in the instalment income of beneficiaries. Without appropriate modifications, taxpayers may effectively be required to make instalments at both the trustee and beneficiary level in respect of the same underlying income.
120. In our view, the most effective notification arrangement is one that leverages existing trust reporting systems and avoids the creation of separate reporting frameworks, offset statements and credit-tracking mechanisms. This objective is more readily achieved under the Withholding Model than under the Treasury Model.
Question 14. Are the complementary collection mechanisms for trustees and corporate trustees proportionate to support the effective collection of the minimum tax?
121. The collection mechanisms proposed under the Treasury Model are not proportionate. Trustee tax liabilities are not ordinarily made jointly and severally recoverable from directors merely because they act as directors of a corporate trustee.
122. Extending personal liability to directors in these circumstances would represent a significant departure from established tax and corporate law principles. It would expose directors to substantial personal risk without any compelling policy justification, particularly where the underlying integrity concerns can be addressed through the alternative collection mechanisms available under the Withholding Model.
123. Under the Withholding Model, the 30% minimum tax is collected through a withholding mechanism applied to discretionary distributions, which substantially reduces the need for additional collection and enforcement measures.
124. Existing tax law and general law principles already provide the Commissioner with avenues to pursue trustee liabilities where appropriate. The imposition of an additional trustee-level tax under the Treasury Model does not justify a departure from these established approaches.
Question 15. Are there any other matters that should be considered in the design of the collection mechanisms?
125. The Government should consider whether the collection and enforcement mechanisms proposed under the Treasury Model are necessary at all. A simpler Withholding Model would significantly reduce the need for additional collection mechanisms, recovery provisions and integrity rules. If the regime is designed around existing trustee taxation concepts, including section 98, the need for bespoke collection rules should be substantially reduced.
126. The Government should also consider the interaction between the Treasury Model and existing TFN withholding obligations. For example, where a beneficiary has not quoted their TFN, the 30% minimum tax could potentially satisfy, in whole or in part, the relevant TFN withholding obligation. Failure to address this interaction may result in overlapping withholding and collection outcomes.
127. We are also concerned with the proposal to provide the Commissioner with a statutory right of reimbursement from trust assets. Such a right may produce inequitable outcomes because trust assets commonly represent the collective interests of multiple current and future beneficiaries. Allowing recovery from the trust fund generally could result in beneficiaries who derived no benefit from the relevant distribution effectively
bearing part of the economic cost of the tax through a reduction in the assets available for future distribution.
128. As a matter of principle, the economic burden of the tax should attach to the entitlement of the beneficiary in respect of whom the liability arises, rather than being borne by the trust estate generally and, indirectly, by other beneficiaries. The Treasury Model should therefore avoid collection mechanisms that permit recovery from trust assets beyond the extent of the relevant beneficiary's interest.
BENDEL / DIVISION 7A
Question 16. What, if any, consequential interactions arise between the minimum tax on discretionary trusts and the revised 2018-19 Budget measure?
129. The revised 2018-19 Budget measure should be legislated so that unpaid present entitlements owing to corporate beneficiaries are treated as Division 7A loans.
130. This approach would directly address concerns regarding the retention of profits within corporate beneficiaries and any potential deferral of tax through the use of unpaid present entitlements. It would also build upon an existing and well-understood integrity framework rather than introducing additional layers of taxation through the Treasury Model. Most taxpayers have been used to treating unpaid entitlements as loans in accordance with the ATO's historical view contained in TR 2022/11.
131. More broadly, the interaction highlights that many of the integrity concerns cited in support of the Treasury Model can be addressed through targeted reforms to existing provisions. Strengthening the operation of Division 7A in relation to unpaid present entitlements would provide a more proportionate response than imposing a minimum tax on discretionary trust distributions.
Question 17. Are there any other issues or implications as a result of the High Court’s decision in 'Bendel' that should be considered as part of the design and implementation of the revised 2018-19 Budget measure?
132. The Bendel decision gives rise to important transitional issues that should be considered as part of the design and implementation of the revised 2018-19 Budget measure. In particular, consideration should be given to the treatment of unpaid present entitlements that arose before the commencement of any legislative amendment.
133. In our view, pre-existing unpaid present entitlements should generally be quarantined from the revised regime. Those arrangements arose under a different legal framework
and should not automatically become subject to new Division 7A consequences merely because of a subsequent legislative response to Bendel.
134. If pre-existing unpaid present entitlements are quarantined, consideration will need to be given to the continued operation of Subdivision EA in relation to those arrangements. Subdivision EA may continue to perform an important integrity function for historical unpaid present entitlements, even if a different regime applies to unpaid present entitlements arising after commencement.
135. More broadly, clear transitional rules will be required to ensure there is no uncertainty regarding the interaction between existing unpaid present entitlements, Subdivision EA and the revised 2018-19 Budget measure. These issues have significant practical implications and should be the subject of targeted consultation before any legislative changes are implemented.
APPENDIX B – ALTERNATIVE WITHHOLDING MODEL
OVERVIEW
Proposed minimum tax regime
136. The proposed minimum tax regime is likely to introduce significant complexity, compliance costs and administrative burdens that are disproportionate to the policy concern it seeks to address. The Consultation Paper contemplates an entirely new regime dealing with minimum tax calculations, beneficiary tax offsets, corporate beneficiaries, trustee beneficiaries, chains of trusts, excess franking credits, collection mechanisms, rollover relief and restructuring pathways.
137. In practice, these measures are likely to result in substantial legal, accounting and implementation costs, together with significant stamp duty liabilities for taxpayers seeking to restructure. Many taxpayers will incur these costs merely to preserve outcomes that are available under the current law.
Policy concern to be addressed
138. In our view, the proposed regime seeks to address the consequences of income splitting rather than the conduct that gives rise to it. The integrity concern identified by Government is the discretionary allocation of trust income to beneficiaries in a manner that allows different marginal tax outcomes to be achieved. If that is the concern, the legislation should directly target discretionary distributions rather than imposing an entirely new trust-level taxation regime.
Alternative withholding framework with minimal impact on business
139. We propose an alternative legislative framework based on a withholding model that applies only to discretionary distributions that are made by trusts. Such an approach would focus on the perceived integrity concern, discretionary distributions, while avoiding much of the complexity, restructuring activity and compliance burden that would arise under the proposed minimum tax regime.
SUMMARY OF THE KEY PRINCIPLES
140. The key principles of the alternative withholding regime are summarised below.
a) A 30 per cent withholding tax would apply to discretionary distributions made by trusts.
b) A discretionary distribution would be defined by reference to the exercise of trustee discretion, which is not consistent with ownership interests, rather than by requiring trusts to be classified as either fixed or discretionary.
c) This would be expanded to cover ‘effectively’ discretionary distributions, where the ownership interests are structured to ‘effectively’ achieve income splitting.
d) The withholding would be calculated based on the beneficiary's proportionate share of the trust's net (taxable) income for the income year. Accordingly, it will be a withholding on tax amounts only.
e) The regime would focus on discretionary distributions ultimately made to individuals, using an exclusion-based framework supported by a ‘character retention’ integrity measure.
f) Where a trust distributes to an excluded entity that is not an individual, no tax would be withheld on the distributions. Excluded entities should include Family Trust Elected group entities, Interposed Entity Election group entities, testamentary trusts, non-residents with respect to foreign income or income already subject to withholding tax, and other entities that do not present the relevant income splitting concerns.
g) A character retention measure would apply to discretionary trust distributions made through interposed trusts, companies or other entities, ensuring that income retains its character and cannot be used to circumvent the withholding rules. Where such an amount is distributed to a trust, all income and gains derived by that trust during the income year would be treated as retaining that character and therefore remain subject to the trust withholding regime. Where such an amount is distributed to a company, the company's profits would similarly retain that character, such that dividends subsequently paid by the company would remain subject to the minimum tax offset rules. Under a FIFO approach, once dividends equal to the after-tax amount of the relevant trust distribution have been paid by the company, subsequent franked dividends would no longer be subject to those rules.
h) Corporate beneficiaries would continue to be permitted. However, unpaid present entitlements owing to corporate beneficiaries would be treated as Division 7A loans and subject to the ordinary Division 7A integrity rules.
i) Transitional rules are critical to preserve existing structures, especially where the group is unable to restructure due to costs or due to significant income tax losses within entities in the family group. While distributions to such entities should
continue to be exempt from the regime, transitional rules could be introduced that will only preserve distributions for a defined period of time.
141. Collectively, these rules would directly target discretionary income splitting while avoiding the need for widespread restructuring, complex trust classification rules, minimum tax offsets, excess franking credit regimes and many of the other compliance burdens associated with the proposed minimum tax framework.
DETAIL OF THE KEY PRINCIPLES
142. In order to implement this alternative framework, eight relatively straightforward principles could be introduced. Those principles are outlined below. We note that, if adopted, we believe that they would address many of the issues identified throughout this paper. For example, we believe that there would be no need for widespread restructuring, no requirement to distinguish between fixed and discretionary trusts, and no need to introduce complex regimes dealing with excess franking credits, minimum tax offsets, tracing rules and related integrity measures.
Principle 1: Withholding on discretionary distributions by trusts
143. The legislation should impose a withholding obligation in respect of discretionary distributions made by trusts. Rather than taxing all income derived by a discretionary trust, the taxing point should arise when income is distributed through the exercise of trustee discretion.
144. This approach would focus directly on the conduct that is said to give rise to income splitting concerns, rather than imposing a trust-level minimum tax regardless of how income is ultimately distributed.
145. We note that section 98 of the Income Tax Assessment Act 1936 (Cth) already provides for a mechanism that is similar to this. Accordingly, we believe that it should be fairly simple to implement a similar withholding mechanism.
Principle 2: Meaning of a discretionary distribution by trusts
146. A discretionary distribution by a trust should be defined as a distribution made to a beneficiary that is not consistent with that beneficiary's ownership interest in the trust. For these purposes, an ownership interest should include any fixed entitlement, unit holding or other objectively ascertainable economic interest recognised by the trust instrument.
147. Applying this principle, broadly a distribution should be regarded as discretionary where it arises through the exercise of trustee discretion rather than through the operation of entitlements held by the beneficiary.
148. To the extent that a trust tries to bypass this rule, an integrity rule can determine the distribution to be ‘effectively’ discretionary. This rule could apply where there are two or more classes of units on issue, or where distributions can objectively be determined to be based on tax characteristics.
149. For example, where a trust has multiple classes of units that effectively direct income to individuals up to a particular threshold and thereafter allocate income to a corporate entity, the distributions should be treated as effectively discretionary notwithstanding the legal form of the entitlements.
150. This approach focuses on the allocation of the taxable amounts rather than attempting to classify trusts as either fixed or discretionary. It therefore reduces the need to develop highly prescriptive trust classification rules and avoids many of the boundary issues that arise under the proposed minimum tax framework. Under this proposal, there would be no requirement to define a ‘fixed trust’ or include a fixed trust elective option.
Principle 3: Amount of Withholding
151. Consistent with the Government's proposed minimum tax rate, the withholding tax rate should be 30 per cent. The withholding amount should be calculated by reference to the beneficiary's proportionate share of the trust's net income (taxable income) as determined at 30 June of the relevant income year (i.e. as determined under Division 6 of the Income Tax Assessment Act 1936 (Cth).
152. We note there is precedent for this mechanism, as contained in s 98 of the Income Tax Assessment Act 1936 (Cth). The tax payable under s 98 could then become ‘nonrefundable’. Accordingly, this alternative mechanism could align with the existing trust taxation framework while providing a direct integrity measure in relation to discretionary distributions.
Principle 4: Scope of the regime
153. It is clear that the policy objective of the proposed measures is to address discretionary distributions to individuals. This scope could be achieved through either an inclusivebased approach or an exclusion-based approach.
154. Under an inclusive-based approach, the withholding rules would only apply to discretionary distributions made to individuals by a trust.
155. Under an exclusion-based approach, all discretionary distributions would potentially be subject to the withholding regime, except where made to specifically excluded entities.
156. While both approaches are capable of achieving the intended outcome, an exclusionbased framework may provide greater flexibility and integrity by ensuring that the regime remains effective where interposed entities are used. Accordingly, we have provided further detail on this in the rule below.
157. We note that absent appropriate integrity measures, the provisions could be bypassed by streaming distributions through interposed fixed trusts, companies or other entities. The Consultation Paper has identified this integrity risk. Accordingly, we have included an integrity provision recommendation (the ‘character retention’ rule 6 below) to address this integrity concern.
Principle 5: Excluded Entities
158. Certain entities that received distributions should be excluded from the withholding regime. In particular, exclusions should apply to distributions made to trusts and other entities that form part of a Family Trust Election (FTE) group. This would include both FTE entities and Interposed Entity Election (IEE) entities and entities that are automatically brought into family groups due to being wholly-owned by family members and/or family trusts. Distributions by a fixed trust, bare trust, or nominee should also be excluded. Finally, distributions by a testamentary trust should also be excluded.
159. Other exclusions that should be considered would include distributions of foreign income to non-residents, distributions of income subject to withholding tax to nonresidents (e.g., franked dividends).
Principle 6: Character retention of distributions through interposed entities
160. To ensure that the withholding regime cannot be circumvented through the use of interposed ‘fixed’ entities, a character retention mechanism could apply. The outcome could be slightly different, depending on whether the distribution is received by a trust or company. The proposed character retention rule would remove the need to define a fixed trust.
161. Where a discretionary distribution is made to a trust, the income should retain its discretionary character within that trust. A similar approach used by superannuation funds could be used in this context. For example, if a discretionary trust distribution is received by a trust, then any distribution made by the receiving trust in the income year should itself be treated as a discretionary distribution and subject to the withholding regime.
162. Similarly, where a discretionary distribution is made to a company, the income should retain its discretionary character. To prevent the conversion of the withholding system into refundable franking credits, the receipt of discretionary trust income would require the company to be subject to the minimum tax offset rules when paying dividends. Once dividends equal to the discretionary trust distributions have been made by the company (after tax) under a FIFO basis, subsequent dividends would be capable of being franked. Under this proposal, tax paid on the discretionary trust distributions would not result in a franking credit.
163. should cause the company's franking account to become subject to a non-refundable credit regime. Whether this is a permanent feature of the franking account of that company, or whether it is limited to the income distributed could be subject to further consultation.
164. This policy therefore targets the relevant integrity concern while avoiding many of the structural issues inherent in the proposed minimum tax model.
Principle 7: Corporate Beneficiaries and Division 7A
165. The use of corporate beneficiaries should continue to be permitted. This provides a source of important working capital and investment capital for many groups in Australia. The proposed minimum tax rules would otherwise result in working capital or investment capital being significant reduced.
166. To address concerns regarding the retention of profits within corporate beneficiaries, any unpaid present entitlement owing to a corporate beneficiary should be treated as a loan for the purposes of Division 7A.
167. This would be consistent with the longstanding policy objective of ensuring that trust profits cannot be retained indefinitely within corporate structures without appropriate taxation consequences.
168. Accordingly, unpaid trust distributions to corporate beneficiaries should be required to comply with the ordinary Division 7A loan rules, including minimum repayment requirements and the use of complying loan agreements where applicable.
169. This approach directly addresses the integrity concern associated with corporate beneficiaries and unpaid present entitlements without imposing the punitive outcomes contemplated by the proposed minimum tax regime. It also removes the need to impose effective tax rates significantly in excess of corporate tax rates in circumstances where the policy concern can be addressed through existing integrity mechanisms.
Principle 8: Transitional
170. The ability to make distributions between family trust elected entities will be critical to allow existing income tax losses to be utilised. While taxpayers may, over time, be able to restructure into corporate groups, this will often only be practical where assets have been realised, new investments can be acquired within a corporate structure, and existing tax losses have been substantially utilised. In many cases, however, the cost of restructuring may be prohibitive, particularly where significant stamp duty liabilities would arise.
171. Accordingly, the exclusion outlined in Principle 5 (Excluded Entities) for family trust elected groups could operate as a transitional measure. For example, the exclusion from applying withholding to a distribution to an entity in the family trust elected group (other than an individual) could continue until substantially all of a trust's assets have been realised and substantially all of its income tax losses have been utilised. The concession could also be limited to trusts established before a specified date, ensuring that it facilitates an orderly transition for existing structures without encouraging the creation of new arrangements.
CONCLUSION
172. The alternative withholding framework outlined above directly targets discretionary income splitting while avoiding the substantial complexity associated with the proposed minimum tax regime. Rather than introducing an entirely new taxation system, the proposed approach focuses on the conduct that is said to create the integrity concern.
173. As a consequence, it offers a simpler, more targeted and more administratively efficient means of achieving the Government's stated policy objectives while significantly reducing compliance costs, restructuring costs, stamp duty driven distortions and unintended commercial consequences.
