This week we will continue our examination of the exposure draft legislation for the proposed 30% minimum tax on discretionary trusts. Last session we considered the proposed definition of “fixed trust” in s 272-65. We could not agree on how to read it, but on either reading an absolutely entitled trust is a fixed trust. The Explanatory Materials take the same view of bare trusts. They say these “are expected to come within the new definition of fixed trust, since the trustee’s role is limited to distributing property in accordance with the client’s instructions”.
This suggests a structure. Many groups already carry on business through a discretionary partnership between a company and the trustee of a discretionary trust. Instead of the discretionary trust, the company could be in partnership with a number of absolutely entitled trusts, one for each person who might receive income. A partnership is not a trust estate. An absolutely entitled trust is a fixed trust. The discretion sits in the partnership, and on the face of the Bill no minimum tax trust exists anywhere in the structure.
Come prepared to discuss the following:
- One trustee, three trusts. Holdco Pty Ltd and Trustco Pty Ltd carry on business in partnership. Trustco is trustee of three absolutely entitled trusts, for Anna, Ben and Claire respectively. The partnership agreement lets the partners determine each year how profits are shared. The partnership makes $300,000, and the partners determine that all of it goes to Trustco as trustee for Anna. How could Trustco, as trustee for Ben and for Claire, agree to that determination consistently with its duties to them? Is that a conflict between duty and duty? If each trust needs its own trustee, does the structure survive in practice?
- Who holds the discretion, and does it matter? Suppose the discretion to allocate profits sits with Holdco alone, or is set out in the partnership agreement. Does each trust still have “no material discretionary elements affecting the entitlements or rights of the trust’s beneficiaries”? Is a discretion over how much the trust’s only asset produces an element “affecting” Anna’s rights? What could the Minister do under proposed s 272-65(4)(b)?
- Is this the ideal structure under the new regime? How does it compare with a unit trust, a company, or staying in a discretionary trust and paying the 30%? Do the rollovers help?
Required Reading:
Treasury consultation: Minimum tax on discretionary trusts – exposure draft legislation
Discussion led by Adrian Cartland