Hamilton Locke Private solicitors Fran Becker and Brett Heading offer these thoughts on Family Discretionary Trusts and what may lie ahead in the Federal Government’s tax reform agenda …

 

 

FAMILY discretionary trusts are commonly used by high net-worth individuals, professionals, small businesses and farming enterprises for asset protection and succession planning.

Because a trust is not itself a separate legal entity, income from a family discretionary trust is typically distributed among a broad class of the trust’s beneficiaries (depending on each beneficiary’s marginal tax rate), offering the further benefit of flexible income streaming across the entire family group while still enabling access to the CGT 50 percent discount and, in some cases, CGT small business concessions.

The taxation of trusts therefore becomes a “flow through” exercise, with taxation being collected at the level of individual beneficiaries.  Only in the absence of distributions in a given income year will tax be applied at the level of the trustee (often a family company) at default rates.

Yet this income streaming advantage of family trusts has caught the eye of Treasury, and the Australian Government, in recent times, fuelling a growing expectation that the tax treatment of family trusts may be altered in potential broad-based reforms to the tax system.

In its annual examination of tax concessions, Treasury revealed that around 1.7 million Australians received $67 billion in trust distributions in 2024.  With long-term budget structural deficit issues – a combination of declining fuel and tobacco excises, lower tax receipts from fossil fuel extraction as the global economy transitions to a net zero emissions future, rising spending, and an ageing population – there is a policy push towards “budget repair” measures.

Both in a speech to the National Press Club in June, and during the course of the Economic Reform Roundtable on 19-21 August, Federal Treasurer Jim Chalmers reiterated the Government’s interest in tax reform, with a view to increased tax revenue while accommodating for the Government’s commitments to lower income tax and leave the GST unchanged.

While noting at the Roundtable that the Government’s immediate focus was on implementing existing tax policies (including the proposed $3 million super tax), the Treasurer also left the door open to new tax changes as part of a deeper consultative process in coming Budgets.

Goverment tax reform agenda

Perhaps inevitably, the view that family trusts are a “tax avoidance vehicle” has been re-enlivened since the National Press Club speech, and the potential for changes to taxes on family trusts was also specifically included in the deliberations at the Economic Reform Roundtable.

While any changes are still a long way off, it is worth considering what may be in store on the reform agenda.

One option may be a uniform flat tax rate on distributions from trusts to beneficiaries, such as the 30pc rate previous proposed by Labor in 2019 when in Opposition (which costings suggested would raise $2.2 billion per year in taxes).

Alternatively, the trust entity itself could be taxed as if it were a company, an option previously explored by the former Howard Government and the Ralph Review into business tax reforms completed in 1999.

Either option could be pitched as “levelling the playing field” from a revenue perspective (by minimising income splitting opportunities), while also reducing complexities in trust administration and planning, and the ever-growing array of tax determinations that now permeate the trusts landscape in Australia.

In pursuing any trust-related tax changes, it is important for a careful balance to be struck.  Increasing the tax burden on family trusts could deliver a “quick win” for budget revenue, but in the longer term could, if not carefully calibrated and balanced, deter capital investment (which may simply be shifted offshore) and undermine productivity and growth opportunities in Australia, and particularly within the agribusiness industry.  This could be counter-productive to genuine budgetary structural reform.

Professional trustees, family offices, farming and grazing families and individuals – along with their accountants and wealth advisors – should keep abreast of developments in this area, in a rapidly evolving economic landscape and, it seems, the clear political will for broad-based tax reform.

 

 

 

 

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