In Australia, tax on trusts could reach 60% — ABC News Australia

In Australia, the government’s proposed 30% minimum tax on the income of discretionary trusts could in some cases result in a combined rate of 60%. This would apply to funds that a trust transfers to so-called bucket companies — companies used to accumulate funds, ABC News reports.

Labor’s initiative provides for a minimum 30% rate for discretionary trusts — structures that allow income to be flexibly distributed among beneficiaries. The government seeks to limit the benefits of distributing income among family members, which can reduce tax liabilities.

How the 60% rate arises

Trusts are used to manage property, businesses and other assets. One common approach involves distributing one person’s income among several family members, who pay tax at their own rates.

For broader tax-planning options, trust owners may create bucket companies to which they direct funds. Such companies pay corporate tax at a rate of 30%, and the money may later be paid to shareholders as dividends. Under the current arrangement, tax paid by the company can be returned as a tax credit, after which dividend recipients pay tax at their personal rates.

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Under the new proposal, income that a discretionary trust transfers to a bucket company would be taxed twice: first with a 30% trust tax and then with a 30% corporate tax. A refund mechanism is provided for payments to family members to prevent double taxation, but it would not apply to bucket companies.

Positions of supporters and business

Australian National University associate professor of tax law Sonali Walpola, who supports the changes, believes they will curb more aggressive use of trusts for tax minimisation. She noted that bucket companies may not conduct operational activities and may be used solely to limit taxation of a trust’s residual income to the corporate rate.

At the same time, business group ACCI criticised the proposal. Its chief executive Andrew McKellar said discretionary trusts help family pharmacies, small construction companies, shops, restaurants and cafes protect assets and plan succession. CPA Australia representative Jenny Wong said bucket companies are also used to retain profits for reinvestment, purchasing equipment, hiring employees or getting through a difficult year.

Under the proposal, the minimum tax can be avoided if the trustee distributes an equal share of income each year among all beneficiaries, including individuals and companies.