The announcement in the Federal Budget that the Government intends to impose a tax on the income distributed by discretionary trusts was something that did not receive much publicity prior to Budget night.

Whilst there have been four reviews over a 50-year period (the first in 1975 and most recent in 2019) relating to the use of trusts within the Australian taxation environment, nothing has ever materialised from a legislative perspective.  Given the history of reviews and lack of change, caution needs to be had prior to making any structural changes to private family groups at this time.

The Government has indicated, in the limited information released to date, that they will be seeking consultation with stakeholders concerning several aspects of the proposed changes.  It is our expectation that a significant amount of consultation and lobbying will occur through the development of the legislation (still yet to be released) which is likely to lead to an evolution of the proposal.  For example, the practical impact of a trust distribution to a company (under the current proposal) could result in an effective tax rate of over 50%.  This would clearly be at odds with sound principles.

In addition to the above, as part of the Budget announcement, the Government indicated that a CGT rollover was to be made available if taxpayers wanted to facilitate a transition to a different structure.  This is slated to be available for three years from 1 July 2027.  Presumably the rollover is different or in addition to the existing rollovers that are available and would need to include alignment with the relevant States and Territories where dutiable property is involved.

We will be actively monitoring the progress of this proposal (together with the other material changes from the Budget).  Until such time as the draft legislation is available, or an exposure draft, it will be difficult to determine a clear path and taxpayers transacting or restructuring before this time would be “jumping at shadows” leading to potentially adverse outcomes.

Whilst the legislation is being prepared, taxpayers can still review their existing structures to determine whether they are still fit for purpose or whether appropriate restructuring opportunities exist with a view to maintaining their commercial objectives.

If you have any questions in relation to the above, the Federal Budget or your affairs generally please don’t hesitate to reach out to your ESV Engagement Partner.