Nick Bruining: How Treasurer Jim Chalmers’ Budget changes affect your family trust

Reading last week’s Federal Budget might have you thinking the ubiquitous family trust is the primary tool of serial tax dodgers.

According to this year’s Budget papers, there were more than 840,000 in existence in 2023, distributing more than $140 billion of income.

Their use is much broader than simply redirecting income, but the announced changes — including a 30 per cent tax on trust income — are likely to put an end to their popularity and use.

And if you’re involved in a family trust, special tax concessions announced by Treasurer Jim Chalmers last Tuesday also mean now might be the time to rearrange your affairs.

Chartered Accountants Australia’s tax and superannuation expert Susan Franks said many small businesses could be affected.

“The trust system is complex and outdated. Without wider change, a flat 30 per cent (tax) rate adds complexity to an already broken system,” Ms Franks said.

Family trusts are sometimes recommended by accountants for small business enterprises and other commercial activities.

More accurately called a “discretionary family trust”, the concept is relatively simple.

The trust is effectively a “box” that holds investments and assets on behalf of individuals and other entities, collectively called the beneficiaries. The beneficiaries can be narrowly or broadly defined.

For example, the beneficiaries of a DFT might include the trustee(s) themselves, their partners, parents, siblings and children — and even grandchildren and great-grandchildren. In WA and many other States, a trust can only exist for a maximum of 80 years.

What the trust can do is defined in a written set of rules called the “trust deed”. The permitted activities of the trust are carried out by an individual, individuals or, in some cases, a corporate entity like a proprietary limited company. Either way, the operator of the trust is called the trustee.

While some trust deeds specifically set out entitlements within the trust deed, a discretionary trust affords the trustee the ability to apply the income and capital of the trust as the trustee sees fit.

Because the trust holds the assets on behalf of the beneficiaries and distributions are made at the discretion of the trustee, they can sometimes protect personal assets and income being seized by creditors if the business gets into trouble.

While income distributions can have a tax minimisation objective, they can also be used to control income payments to disadvantaged beneficiaries. For example, the trustee may decide to limit distributions to a beneficiary with a gambling addiction or another facing financial problems.

North Perth-based chartered accountant Phillip Seiber said the arrangement was more popular in the early 2000s.

“But since then, we’ve seen governments from both sides of the political fence erode their usefulness through rule changes and tougher tests to pass,” Mr Sieber said.

“The preferred vehicle to operate a trading business these days is a proprietary limited company. The Budget changes effectively reinforce that arrangement.”

Up until last Tuesday, shifting from a trust to company structure potentially triggered a number of serious issues that effectively blocked the change.

“These included the accounting costs of restructuring but, more significantly, the possible triggering of capital gains tax events which could generate huge tax and other liabilities,” Mr Sieber said.

The announcement included special rollover concessions which effectively allow trustees to move assets to a company or other structure tax-free. In some cases, the State Government will also need to play ball by waiving stamp duty liabilities when assets like real estate are transferred.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association