A matter of trusts – changes creating chaos for planning

Daniel Butler, director of DBA Lawyers, said on the latest SMSF Adviser Show that with franking credits, family trust elections and minimum tax rules converging, the profession is facing a level of complexity that threatens to make traditional trust planning unrecognisable.

“Technically, everything that is not within the very strict bound of a fixed trust is a non-fixed trust. A discretionary trust is a very loose definition, and there’s no general normative meaning of a discretionary trust, nor a unit trust, so we’re getting into areas of real complexity,” Butler said.

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 “The devil will be in the details, and we still have to see what will happen, and that’s what our concern is in the tax industry.”

Butler said the result of this uncertainty is the potential of “enormous” changes for advisers structuring business who will now have to very carefully consider whether a trust will be a viable option.

“Having said that, over the years when we step back and the dust has settled, we still think a trust will be there for asset protection, for succession, despite the tax disadvantages,” he said.

Butler continued there will also be challenges regarding franking credits under the Budget proposals.

The 2026 Federal Budget introduced a $4.5 billion tax overhaul on discretionary trusts, primarily affecting franking credits and bucket companies starting 1 July 2028. From that date, discretionary trusts will be subject to a minimum tax rate of 30 per cent. Trustees will be required to use any available franking credits to satisfy this minimum tax liability before anything else. Under the proposed reforms, franking credits will no longer be refundable to individuals cycling through trusts.

Butler said a family trust receiving dividends from a large publicly listed company, which is only paying tax at 25 per cent because it’s carrying on active business activity, will get a 25 per cent frank dividend into the trust.

“That is then distributed to a beneficiary, and there’s a minimum 30 per cent collection tax at the trustee; that non-refundable tax that must be withheld by the trustee before it distributes that amount,” he said.

 “Let’s say it’s $100 that gets in as a dividend and 25 per cent is a franking credit. That franking credit you don’t get the cash for so what effectively will happen is that 25 per cent based on what we know will be offsetting the non-refundable 30 per cent minimum tax.

“The trustee will then have to top up the tax by five per cent. You can see how this is going to get quite complex, because you’re going to have dividends coming in with 30 per cent franking credit, some with less, some at 25 per cent franking credit. It will all have to be worked out.”

He added there is also going to be unit trust distributions, or managed trust distributions, where franking credits will be coming through at different rates.

“It will be very complex, and give rise to more complexity, and a lot more work for advisers because of the family trust election issue,” he said.

“There is a prediction that advisers and tax agents won’t be doing family trust work in the future because the liabilities on these family trust election cases are getting into the hundreds of millions of dollars, and insurers are likely to withdraw insurance coverage, given the consequences that are happening.”

He added there is a need for the Government to make some urgent changes, both on family trust elections and the overall rules at work around family trusts.