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If introduced, this change is likely to prompt many families to restructure their trust arrangements, including transferring assets out of discretionary trusts into other entities, as the benefit of taxing at the beneficiaries individual marginal tax rate will no longer be a benefit.
A key practical complexity under the proposed 30 per cent minimum tax regime is how it interacts with distributions to corporate beneficiaries. While individual beneficiaries will receive a non-refundable credit for the tax paid by the trustee, it appears that corporate beneficiaries will not receive a credit for the tax paid by the Trustee.
Unlike the current system (where a corporate beneficiary is assessed directly on its share of trust net income), if the discretionary trust itself is subject to a minimum tax on distributions, there may be no mechanism for a corporate beneficiary to obtain a credit for that tax. This could result in the same income being taxed twice, leading to double taxation.
As a result, structures that currently rely on corporate beneficiaries may require reconsideration, potentially triggering boarder restructuring of family group arrangements.
While the budget indicates that tax rollover relief may be available to support these restructures, stamp duty should not be overlooked – particularly where the trust holds property.
Some states provide for stamp duty relief (e.g. exemptions or concessions) for the transfer of assets out of trusts to beneficiaries. However, these exemptions and concessions are state specific, with each state having its own specific criteria to quality for stamp duty relief. This article sets out some key considerations that should be considered prior to any contemplated or proposed restructures concerning discretionary trusts and assets held by such trusts.
Stamp duty can be imposed at rates up to 6.5 per cent on the market value of certain assets. Surcharges of up to 9 per cent can apply in respect of residential land acquired by foreign persons.
Most commonly, this includes:
Although some states provide exemptions or concessions when transferring trust assets to beneficiaries, these rules:
This means that restructuring a trust could result in unexpected duty costs if not carefully planned. Therefore, it is important that prior to undertaking any transfer of assets held by a discretionary trust to beneficiaries, some key issues must first be considered to also understand whether a stamp duty liability arises and whether any concession or exemption from duty is available.
Before transferring any assets, the starting point is always the trust deed. This is because:
Other matters that need to be confirmed prior to undertaking the transfer include:
A common example is foreign beneficiary exclusion clauses in trust deeds, which are often included to avoid the imposition of the foreign land tax surcharge or duty surcharges. In some cases (particularly in New Sout Wales), these exclusion clauses are irrevocable, meaning they cannot be changed.
If a proposed recipient is excluded under the trust deed, the distribution or transfer may not be permitted, and relevant duty relief may not be available.
Each state has its own rules and criteria regarding whether a distribution to a beneficiary under the trust deed can be exempt from duty.
Victoria can provide a full duty exemption where certain conditions are met, including:
New South Wales generally offers only a nominal duty of $100, rather than a full exemption.
However, the exemption in New South Wales is extremely restrictive. For example:
This requirement often creates issues in practice, as many trusts are initially settled with nominal assets (e.g. cash), and subsequently acquire property.
Like New South Wales, Queensland offers an extremely restrictive exemption.
An exemption can apply to the extent it represents that beneficiary’s ‘trust interest’ on a distribution from the trust. In the context of discretionary trusts, only a taker in default has a ‘trust interest’. Therefore, the exemption generally cannot apply to an in-specie distribution to a beneficiary who is merely a discretionary beneficiary.
While stamp duty is a critical cost, restructuring a discretionary trust should also be assessed more holistically. Whether a trust arrangement should be restructured should consider:
These factors, when combined with stamp duty and the proposed trust distribution tax, mean that restructuring decisions should be undertaken with a whole-of-group modelling approach rather than a tax-only lens.
While restructuring a discretionary trust may be attractive in light of the proposed tax changes, stamp duty can be a significant cost if not carefully managed.
Before proceeding, it is important to:
If you are considering restructuring your trust arrangements in response to the proposed changes, we recommend obtaining advice early.
Please contact your usual Grant Thornton contact or reach out to Kristina Popova, State Taxes Partner, to discuss the potential stamp duty implications.
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