The proposed 30% trust tax: the new “election” option may solve a tax problem – but could spark disputes over trustee discretion.
The Federal Government has now released exposure draft legislation for its proposed 30% minimum tax on discretionary trusts, intended to apply from 1 July 2028. The legislation is still only a draft and may change before it becomes law.
Under the proposal, the trustee of an affected discretionary trust would generally pay tax of at least 30% on the trust’s taxable income. Individual beneficiaries may receive a non-refundable tax offset for the tax paid by the trustee. Importantly, corporate beneficiaries would not receive that offset under the current draft.
A new option: beneficiary election
One of the most important changes since the Government’s original proposal is a new “excluded election trust” regime.
Instead of restructuring the trust into a company or fixed trust, an existing discretionary trust may be able to elect out of the 30% minimum tax. To do this, the trustee must elect a beneficiary/ies in advance:
- the eligible beneficiaries who will receive the trust’s income and capital; and
- the percentage each beneficiary will receive.
Those percentages must add up to 100%, and each beneficiary’s percentage of income must generally be the same as their percentage of capital.
For example, a family trust might elect beneficiary A for 50% and beneficiary B for 50%. The trust can remain legally a discretionary trust, but if it wants to keep the tax exemption it must distribute income and capital in accordance with that election each year. If the trustee chooses not to do so, the election can be automatically revoked.
This sounds attractive. However, tax law is only half the story.
Could the election create a trust law problem?
The draft explanatory materials say the election does not legally remove the trustee’s discretion under the trust deed. The trustee can still make a different decision – it simply risks losing the tax exemption. Treasury also expressly says trustees should consider whether making the election is appropriate and consistent with their trust deed.
That creates an interesting tension.
Australian courts have increasingly emphasised that a discretionary trustee cannot simply follow a predetermined formula without properly exercising its discretion. In Owies v JJE Nominees Pty Ltd [2022] VSCA 142, distributions were successfully challenged where the trustee had not given “real and genuine consideration” to certain family beneficiaries. The Court ultimately removed the trustee.
This means the new election could produce an unusual result. A trustee may nominate a fixed 50/50 split for tax purposes, but still need to genuinely consider whether continuing with that arrangement is a proper exercise of its discretion under trust law.
An excluded child or other significant beneficiary could potentially challenge the trustee if the trustee simply follows the tax election year after year without properly considering their circumstances. The election does not automatically give every beneficiary a new right to money, but it could provide important evidence in a later dispute that the trustee had effectively predetermined its decisions.
What should corporate groups be doing?
The election should therefore not be treated as a simple tax form. Before making it, trustees should review the trust deed, identify the eligible beneficiaries whose interests should genuinely be considered, think carefully about succession and family changes, and document why the proposed election is appropriate.
For some groups, the election may be an excellent way to avoid the proposed 30% minimum tax without moving assets or restructuring. For others, locking today’s arrangements into tomorrow’s trust distributions may create a much larger legal problem than the tax problem it solves.
Mahoneys’ corporate team specialise in personal and corporate structuring, with specific expertise on how these impacts on tax, succession, and family changes.
The firm, and its lawyers were recognised in Doyle’s Guide to the Australian Legal Market, and The Best Lawyers in Australia.
Feel free to contact Antony Harrison (aharrison@mahoneys.com.au) or Rhys Williamson (rwilliamson@mahoneys.com.au) if you want to discuss the impact of the proposed changes on your personal and/or corporate structures.
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