Taxing of Discretionary Trusts

For those clients who currently operate their business through a trust and distribute to family members, these changes will affect you. Under the current legislation (assuming Personal Services Income rules don’t apply), you are generally able distribute profits to various family members for tax
minimisation purposes.

However, the opposition leader, Bill Shorten announced back in July 2017, that a Labor government would introduce a minimum 30% tax rate on any distributions made from a discretionary trust to beneficiaries over the age of 18.

This means that any distribution made to family members over 18 that have minimal income (apart from any trust distributions), will pay 30% tax on these distributions.

Under the current rules, if you were to distribute money from a discretionary trust to a spouse who earned less than $20,500. Any distribution made to the spouse would be tax free, as long as the spouse’s income didn’t exceed $20,500.

By way of example. Harry and Megan are both beneficiaries of their family trust. They have one child (Charles) under 18 and another child (Carmila) who is 20 years old (currently studying at university). Neither of these children work. Megan works part time during the year and earns $5,000.

Under the current legislation the trust can distribute $416 to Charles who is under 18. The trust can distribute up to $20,500 to Carmila tax free and a further $15,500 to Megan tax free. This equates to $36,416 that is able to be distributed from the trust tax free.

Using the above example under Labor’s policy…. $36,000 would be taxed at 30%. This equates to $10,800 tax. This is a substantial increase in tax to the current legislation.

The above advice is general advice and does not take into account your objectives, financial situation or needs. You should consider whether the advice is suitable for you and your personal circumstances.


Kim Jay