More carve-outs from Labor’s rushed plan to impose a 30 per cent tax rate on discretionary trusts are likely after Treasury flagged it was looking for ideas on how to deal with a potential $3 billion hit to the not-for-profit sector.
Churches, sporting clubs and other groups will lose $510 million in the first year the new tax starts if exemptions are not found because they will not be able to use any credit for the tax taken out of distributions from discretionary trusts, according to analysis by Fowler Charity Law, which provides legal services to the not-for-profit sector.
Labor has already been forced to back down on its plan to impose the tax on testamentary discretionary trusts after it was attacked as a “death tax” that would have imposed penalty tax rates on distributions to minors. Any changes to the budget announcements would follow previously flagged carve-out exemptions to the capital gains tax changes after a backlash from tech entrepreneurs.
Treasury acknowledged the problem with not-for-profit organisations last week when it called for submissions on the tax proposal, and the government is believed to be in talks on the issue with charities and not-for-profits.
“I was pleased to see Treasury ask that question in the consultation paper because it was one of the issues that the minimum tax on capital gains ran up against,” tax partner at BDO Mark Molesworth said, adding that he thought there was “genuine interest” in Treasury finding a solution.
The scale of the shortfall in funding if nothing is changed will increase every year, reaching more than $690 million in the year ended June 30, 2033, taking the toll to $3 billion over five years, the analysis showed. Religious leaders have already warned that the tax would hit Labor’s plans to double philanthropic giving by 2030.
“Sporting organisations and other charities often won’t know that they’re the beneficiaries of distributions from discretionary trusts, because discretionary trusts aren’t actually required to name themselves as such on their bank account records,” said Fowler Charity Law principal Mark Fowler.
“The first time they are going to know that the income is coming from a discretionary trust is as of 1 July, 2028, when the reform comes in place, there’ll be 30 per cent less coming through that bank account.”
Michael Stead, the Anglican Bishop of South Sydney who spearheaded a letter that highlighted the impact on charities, said moving to giving from companies or fixed trusts would reduce overall donations.
“What is lost in these alternative arrangements is the discretion to vary percentage distribution from year to year,” Stead said from London.
“This will have a negative impact on charities and other NFPs because philanthropy is often from the ‘discretionary’ part of income – that is, people give more in good years and have to wind back their giving in lean years.
“Moving to a fixed distribution structure necessitates locking in a lower percentage.”
Importantly, so-called deductible gift recipients – that is, any organisation that is allowed to offer tax-deductible donations, such as registered charities like the Fred Hollows Foundation, the Smith Family or the Red Cross – would not be affected by the change because donations to them from trusts, companies and individuals remain tax-deductible.
The Fowler analysis calculates that $1.1 billion was given by discretionary trusts in the year ended June 30, 2023, to not-for-profits that are not DGRs.
That list includes some human rights organisation, churches, educational organisations, social welfare charities, cultural organisations, health organisations and sporting groups.
Donations to these groups are not tax-deductible in the same way as donations to DGRs. That means it has been advantageous to donate to them through trusts because until budget night, discretionary trusts were flow-through vehicles – meaning the tax due on the earnings was paid by the group or person that received them.
Fowler said, “this represents a long-standing structural feature of the Australian taxation system that has served to increase philanthropic giving for many years”.
If that group was an income-tax-exempt not-for-profit, it would not pay tax, so any donation made to it would be received in full. But the budget night measure will mean donations made to such a group after July 1, 2028 will have 30 per cent deducted by the trust before it is donated.
The issue could be resolved by excluding distributions to income tax-exempt organisations from the 30 per cent trust-level tax, Fowler said.
Changes to Tax Act
“For those businesses operated through discretionary trusts that roll over to companies, grant a further ability to claim a refundable tax offset to those charities and not-for-profits that receive distributions from a discretionary trust that becomes a shareholder in the company,” he said.
Alternatively, the Tax Act could be changed to give deductible status to more organisations including non-DGR charities and self-declared not-for-profits, he said.
Molesworth agreed that expanding the list could be the most workable solution.
“The most obvious solution is that that non-refundable credit for the trustees tax becomes refundable to the same sorts of organisations that can get refunds of franking credits, so that’s broadly income tax-exempt charities and deductible gift recipients. That will put the odd sporting club at a disadvantage still, but it probably mops up a lot of the issue,” Molesworth said.
More broadly, Molesworth said the bigger problem with the proposed changes to trust taxation is that the government is looking only at structures – not behaviour.
“The government is actually thinking too small picture. Taxing trusts at a minimum rate of 30 per cent could allow for massive simplification if sufficient time is allowed to properly consider the necessary amendments,” he said.
“The government has not learnt its lesson from its rushed CGT amendments.
“Just as the original CGT reform legislation did not sufficiently differentiate between passive investments and risk-taking entrepreneurial businesses, this proposal treats all discretionary trusts as homogenous, rather than recognising the disparate uses to which they are put.”
Source: https://www.afr.com/politics/federal/more-carve-outs-from-trust-changes-likely-after-3b-hit-to-charities-20260709-p60e0a