Do Family Trusts Have a Future?

This is a very awkward time to advise on structuring, with all the established paradigms upset and the new rules yet to be finalised. So I am probably a bit crazy to offer some thoughts on whether discretionary trusts have a viable future! I think they do.

·         The proposed 30% minimum tax rate on discretionary trust distributions (from 1 July 2028) will really only impact beneficiaries who have less than $45,000 of other income (because the ordinary 30% personal income tax rate for kicks in at that point). So, for “workers” with salaries and investors with substantial non-trust income, a discretionary trust would still be the preferred entity for passive investments. A discretionary trust will still offer asset protection against business and personal liabilities and the “discretionary” factor will allow the trust income to be split between adult beneficiaries in whatever proportion is optimal on a year-by-year basis.

·         Where the proposed new trust tax rules bite is when your children reach 18yo and become low-income, expensive-to-run Uni students. The little darlings are no longer attractive trust beneficiaries unless you can pump up their non-trust income in a legitimate but tax-effective way (such as by way of salary from a business that employs the kids at the time).

·         So what happens where a discretionary trust receives income that includes franking credits, such as dividends from the family operating company? While under current law, trusts are transparent and simply pass the credits though to the beneficiaries proportionately, under the announced changes, the credits will be applied to reduce or eliminate the 30% minimum tax on the distributions. Will surplus credits be refundable? Distributable? Probably not.

·         The proposed capital gains changes (from 1 July 2027) still favour a discretionary trust over direct individual ownership, mainly due to asset protection and the flexibility of distributions on a year-by-year basis. Companies become less unattractive as an investment vehicle than before as they did have access to the capital gains discount anyway.

In a nutshell, I don’t think the changes will eliminate discretionary trusts as a preferred investment vehicle due to the asset protection and flexibility of distributions. The new rules will, however, diminish their effectiveness as a vehicle to split income with low-income family members. I might have a different view for investors who are close to retirement because they will have less non-trust income and most superannuation pensions are tax exempt.