How discretionary trusts are now taxed
At this time, a discretionary trust itself is generally not taxed at the trustee level. Instead, income is distributed to beneficiaries, who are taxed at their own individual marginal rates.
That structure allows for “income splitting”: A manager can direct income toward family members with lower personal tax rates rather than concentrating it all on the person who earns the most, reducing the household’s overall tax bill and, in turn, overall tax revenue.
There is currently no minimum tax rate associated with trust distributions, which is what the government wants to change.
What the government proposes
In the May Budget, Labor announced a flat 30% minimum tax on discretionary distributions from trusts. Faced with the rejection of the industry, the government made a concession earlier this month: Existing discretionary trusts may uniquely choose to nominate fixed beneficiaries who retain their current tax treatment.
Once a trust elects fixed distribution, it is largely assured. If a trustee violates the election by distributing differently than agreed, the trust loses the benefit and is assessed the maximum marginal tax rate (up to 47%) plus the Medicare tax for that year.