Michael Klatt, Partner – Mullins Lawyers
Many hoteliers operate their business utilising discretionary trust structures. The Federal Treasurer announced in the budget presentation that legislation would be introduced to Parliament having the effect that income on discretionary trusts would be taxed at a minimum of 30 cents in the dollar. The effect of this would be that the trustee of a discretionary trust (a family trust) would pay tax at that rate and beneficiaries who receive or are allocated the income would receive a franking credit for the tax paid by the trustee.
Concerningly, it was announced that if trust distributions are made or allocated to corporate beneficiaries, corporate beneficiaries will not receive the benefit of the franking credit. This would result in double taxation of distributions to corporate beneficiaries. Further, if an individual beneficiary’s personal tax rate is less than 30 cents in the dollar, the beneficiary would not receive a refund of part of the franking credit. The legislation has yet to be introduced to parliament and therefore is too early for businesses to be considering a restructure of their entities.
The Federal Treasurer initially announced that testamentary discretionary trusts would also be subject to the new tax laws however, some weeks later it was announced that testamentary discretionary trusts would be exempted from the new tax laws.
Assuming that the legislation is introduced and passed as announced, testamentary discretionary trusts will become a preferred structure from a tax point of view in the event that sufficient assets can pass from a person’s estate into the testamentary discretionary trust. These trusts are similar to family trusts but are established under the terms of person’s Will. Income generated on assets held in the testamentary discretionary trust can be distributed to beneficiaries at the beneficiary’s tax rate and won’t be subject to a minimum 30 cents in the dollar tax rate. Further, another advantage that a testamentary discretionary trust has over a family trust is that distributions of income can be distributed to minor beneficiaries at the adult tax rate, that is $18,200 tax free and adult marginal rates.
In the event that a family trust is currently being utilised by a business and the trust owes money to the individuals (typically the controllers of the business) those loan accounts or unpaid present entitlements could pass to a testamentary discretionary trust to take advantage of that structure post death.
Our advice to beneficiaries of deceased estates is not to opt out of utilising testamentary discretionary trust structures without first obtaining professional advice.
Should you have any questions about this, please do not hesitate to contact the team at Mullins.