New Fixed Distribution Election for Discretionary Trusts
The Federal Government has proposed a new option for discretionary trusts that exist on 1 July 2028. Trustees will be able to make a one-off election during the 2028-29 income year to nominate beneficiaries who will receive fixed percentages of the trust’s income and capital, allowing the trust to avoid the proposed 30% minimum income tax.
Key points:
- No trust restructure is required.
- No limit on the number of nominated beneficiaries.
- Fixed percentage entitlements generally continue indefinitely.
- Trustees cannot change beneficiaries or percentages from year to year.
- Limited changes are allowed on death of a beneficiary or certain relationship breakdowns.
- Beneficiaries pay tax at their normal marginal tax rates or applicable company tax rates.
Advantages
- Avoids the proposed 30% minimum tax.
- Eliminates the need for a costly trust restructure.
- May avoid stamp duty and asset transfer costs.
- Provides certainty regarding beneficiary entitlements.
Disadvantages
- Loss of distribution flexibility, which is a key benefit of discretionary trusts.
- Once revoked, the election cannot be reinstated.
- Strict compliance is required.
- Failure to distribute according to the fixed percentages may result in the trustee being taxed at the top marginal tax rate plus Medicare levy and the trust losing access to the election.
Trustees should carefully consider whether the tax benefits outweigh the loss of flexibility before making the election.