Australia offers small businesses a mechanism to avoid trust tax
Australia’s federal government has proposed a mechanism under which small businesses may be exempt from the new minimum 30% tax on discretionary trusts without changing the trust structure. This is intended to help avoid restructuring, which can usually trigger the payment of stamp duty in states and territories. ABC News Australia reports.
Fixed distribution arrangement
The draft legislation provides that trustees of discretionary trusts will be able to choose a fixed distribution of income among existing beneficiaries. They will be exempt from the tax if they maintain this distribution arrangement. This will make it possible to avoid transferring assets to a company or a trust with a fixed income distribution.
Discretionary trusts allow owners to distribute income among companies and beneficiaries, as well as change the distribution over time. The Australian government has said that such structures are used to minimise taxes. Moving to a company or a trust with a fixed distribution would deprive owners of this flexibility but would allow them to avoid paying the new tax.
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Stamp duty and exemptions
In Australia, stamp duties are levied by states and territories when property is transferred or transactions involving it take place. Property also includes financial assets, so restructuring a small business can usually trigger such a payment. Small business representatives warned the government that owners of discretionary trusts could face a choice between a higher tax burden and costly restructuring.
The draft also proposes not applying the tax to donations from discretionary trusts to registered charities, deductible gift recipients and income-tax-exempt organisations, including religious groups or sporting clubs.
The tax is scheduled to take effect in mid-2028. Exemptions are provided, among others, for pension funds, trusts for people with disabilities, deceased estates, testamentary and charitable trusts, as well as farm income. Consultations on the draft will last two weeks and end on 18 September.
