Some early industry discussion on the 2026–27 Budget measure has suggested that the effective tax rate on trust income distributed to a bucket company will rise to around 51 per cent once the minimum tax commences on 1 July 2028. On a careful reading of the Treasury's fact sheet (the Fact Sheet), the position appears to be considerably more adverse than suggested.
What the Fact Sheet provides
The Fact Sheet confirms that the trustee will pay 30 per cent tax on the taxable income of the trust. This tax is payable by the trustee after the trustee has appointed income to beneficiaries; the entitlement to the income has already been determined. Individual beneficiaries will receive non-refundable credits for the trustee's tax. As to corporate beneficiaries, the Fact Sheet states:
“Under the minimum tax, corporate beneficiaries will be assessed based on the trust income to which they are entitled, without being able to claim credits for tax payable by the trustee. This will ensure the minimum tax cannot be avoided by cycling income through a 'bucket' company. “
Some industry discussion assumes that the trustee's 30 per cent minimum tax reduces the income that flows through to the corporate beneficiary for assessment — as though the company is only assessable on $70 out of every $100. The Fact Sheet does not support that reading. The Fact Sheet suggests the corporate beneficiary is assessed on the full $100 to which it is entitled, without any credit for the trustee's tax.
A worked example
The following table illustrates the position for Jim, whose family discretionary trust earns $100 of taxable income distributed to JimboCo, a bucket company. It compares current law, the model some media commentators appear to have adopted, and the position as described in the Fact Sheet. (see article)
Under current law, the bucket company structure achieves tax deferral at a 30 per cent rate, and the total tax on $100, once a dividend is paid, equals the top marginal rate of 47%. The current system, because of imputation, results in the same amount of tax as if the trustee distributed directly to Jim. That is, in this simple example there is a deferral benefit only.
Under the media model, the effective rate across all levels rises to approximately 63 per cent. On the Fact Sheet, it approaches 70 per cent.
Note that under the Fact Sheet model, JimboCo's franking account balance ($30) exceeds the maximum franking credit that can be attached to a $40 dividend ($17.14), leaving $12.86 trapped in the franking account. Separately, the Fact Sheet notes that stakeholder views will be sought on how the trustee uses franking credits that exceed the minimum tax liability. The trapped franking credits at the corporate beneficiary level appear to be a distinct and unaddressed consequence of the model.
This is not the 2019 proposal
The 2019 proposal by the then Bill Shorten led Labor opposition was structurally different. It contemplated a minimum average tax rate of 30 per cent applied to discretionary trust distributions to adult beneficiaries, where the beneficiary remained the relevant taxpayer and the liability was assessed by reference to the distribution received. The 2026 measure shifts the incidence of the liability. The minimum tax is imposed on the trustee, calculated by reference to the taxable income of the trust and the trustee's appointment of that income and creation of entitlements in favour of beneficiaries. Corporate beneficiaries receive no credits for that trustee-level tax, yet remain assessable on the full amount of their entitlement. The structural consequence is double taxation where bucket companies are interposed. It appears that outcome, double taxation, was deliberate and intended.
Looking ahead
The new model also raises unresolved questions about the interaction between trust law and tax law, in particular the relationship between what the beneficiary has a present entitlement to (and can call on) and what the trustee is practically able to distribute after discharging the minimum tax liability. We expect these issues will be addressed once consultation commences on the more detailed explanatory material later this year.
This article was originally published on the Sladen Legal website: The Minimum Tax on Discretionary Trusts: Bucket companies are worse than you think
