The Federal Budget announced the introduction of a minimum 30% tax on all discretionary trust income as of the 1st of July 2028 to be paid by the trustee before any distributions are made to beneficiaries. Franked dividends can no longer be distributed to beneficiaries as the trustee must use them to pay the tax. There goes the benefit of Discretionary Trusts!
A franked dividend is an after-tax profit distributed to shareholders that includes a “franking credit” (tax offset) to prevent double taxation under Australia’s dividend imputation system. As the company has already paid corporate tax on the earnings, it passes this tax credit onto the investor.
Beneficiaries who receive a distribution receive a non-refundable tax credit to recognise that tax has already been paid on the income by the trustee.
This is a major shift in taxation policy under the Budget and will likely mean discretionary trusts will become less attractive as income splitting will now be limited and have tax consequences with a 30% tax on trust income.
With an estimated 350,000 small businesses that currently operate through a discretionary trust we suggest small business owners should review their structure with their Accountant and financial advisor to look at whether they should restructure to a standalone company as the company tax rate is 25%.
However, consideration should be given to any CGT trigger if you restructure the business, therefore appropriate taxation advice should be sought before any restructure.
As presently announced the 30% tax rate will apply only to discretionary trusts not fixed (unit) trusts, complying superannuation funds, special disability trusts, deceased estates, and charitable trusts.
Another important change is that a corporate beneficiary of a Discretionary Trust (a” bucket company”) will no longer receive non-refundable tax credits This is aimed to reduce the number of “bucket companies” that receive trust income.
A bucket company is a corporate beneficiary that receives trust income that pays the corporate tax rate of 30% and then distribute it to shareholders with the company receive franked dividends
Bucket companies will likely no longer be as attractive as the trustee of a Discretionary Trust will under the changes now pay the 30% tax before distributing the income to beneficiaries with non-refundable credits to the bucket company which will pay tax again once it distributes to its shareholders.
This will likely affect corporate beneficiaries who legitimately carry on a business and are not solely used as tax minimisation structures.
