Minimum tax on discretionary trusts
The Tax Institute welcomes the opportunity to make a submission to the Treasury in respect of its consultation regarding the minimum tax on discretionary trusts (Consultation Paper).
We recognise the Government's objective of reducing inappropriate income splitting through discretionary trusts and improving the fairness of the tax system. We also acknowledge Treasury's efforts to develop exclusions and transitional measures, including the proposed rollover relief. However, we are concerned that aspects of the proposed design go beyond what is necessary to achieve the stated policy objective of preventing income splitting. Key concerns include the scope of the discretionary trust definition, the treatment of corporate beneficiaries and tax-exempt entities, the significant cost and complexity of restructuring, the impact on family businesses and succession planning arrangements, and the cumulative compliance burden imposed alongside a range of concurrent tax and regulatory reforms.
In particular, we submit that corporate beneficiaries should not be subject to a penalty under this measure. The minimum tax is levied at the trustee level and the credit is non‑refundable for non‑corporate beneficiaries. Companies already face a ~30 per cent tax rate. The rules should ensure no extra impost on companies and keep outcomes at, not above, 30 per cent.
We are also concerned that the consultation and implementation timeframes may not provide sufficient opportunity for stakeholders to properly assess and respond to reforms of this scale.
Consultation timing
The consultation period for this Consultation Paper is only three weeks. This is significantly shorter than Treasury's consultation on Modernising the Taxation of Trust Income – Options for Reform which was open from 21 November 2011 to 10 February 2012, approximately three months. Given the scale and complexity of the proposed reforms, their potential to affect well over one million trust structures, their significant implications for small businesses, family groups, primary producers and investors, and the fact that these measures are not intended to come into effect until 1 July 2028, additional consultation appears necessary before they are finalised.
The consultation also coincides with a range of other major tax and regulatory reforms affecting many of the same taxpayers and advisers, shortly after year-end compliance obligations have been completed. Reforms of this significance warrant sufficient time for taxpayers, advisers and other stakeholders to assess the practical, commercial and economic consequences of the proposal and provide informed feedback. Meaningful consultation is critical to maintaining stakeholder confidence in the policy development process, and a consultation period of only three weeks risks creating a perception that stakeholders have not had a genuine opportunity to engage with the detailed design of the measure. Further consultation, including once exposure draft legislation becomes available, would assist in identifying unintended outcomes and improving the quality of the final legislation.
Our summary of key findings and recommendations are contained in Appendix A and our detailed responses to questions raised in the Consultation Paper are contained in Appendix B.