The trust taxation measures have received a good deal of publicity in the days after the Federal Budget despite the application being two years away (the proposals take effect from 1 July 2028).  Details of the proposals are scant, and the actual legislation is yet to be received, however, the proposal would clearly be focused on driving taxpayers to use companies to structure their affairs.

We have summarised below the top line take aways from the information that is currently available.

• Trustees will be required to collect a 30% tax on income distributed to beneficiaries.
• For individuals with other income of more than $45,000 (marginal tax rate exceeding 30%), this is not expected to impact the overall amount of tax paid;
• For individuals with other income of less than $45,000 (whose marginal tax rate is less than 30%), this is expected to increase the overall amount of tax paid, as tax at 30% is paid on the first $45,000;
• For corporates, the current proposals could result in an effective tax rate in excess of 50%. This would appear to be at odds with sound principles and could, depending on the ultimate structure, result in an effective tax rate of over 60%.
• Trustees that receive franked dividends will be required to use their franking credits to pay the minimum tax, but the franking credit will not flow through to beneficiaries.
• The proposals do not address the situation where the available franking credits received by the trustee exceed the amount that would be required to be withheld under the proposal. How this is to be dealt with, will be determined by consultation with “stakeholders”.
• The proposal is focused on income not capital gains; however, this is anticipated to be because of the changes announced in relation to the minimum tax imposed on capital gains with effect from 1 July 2027.

How the proposed trust taxation changes ultimately land when taken into consideration with the CGT changes can only be evaluated when the legislation is released and relevant consultation and lobbying has been undertaken.  We will continue to monitor progress of the proposal including the legislation development and will provide updates as they become available.

If you have any questions in relation to the above, the Federal Budget or your affairs generally please contact your ESV Engagement Partner.