The new EET election: Gifts from Santa, or Krampus?

From 1 July 2028, discretionary trusts face a new 30% minimum tax, but a new Excluded Election Trust (EET) election offers a way out if trustees are willing to lock in fixed distributions to nominated beneficiaries.

The new regime will likely benefit those operating in trusts who have the simplest of affairs in respect of how they have managed their trust to date. Specifically, those trusts that are the only structure in a client group and distributions have historically been made to “mum and dad.”

For many other trusts, the new regime may very well be a “wolf dressed as a sheep”. There may also be a few more wolves turning up, given the Government has flagged that further tranches of legislation are to be expected that will address administrative, integrity and other implementation measures.

What are the new EET election and restructuring options?

On the positive side, trusts will have the opportunity to either make an EET election or restructure. On the former:

• the trust must be in existence on 1 July 2028;
• the election can only be made in FY29;
• it is a one-shot election. Once revoked, it cannot be remade;
• the nomination of beneficiaries must be for income and capital, meaning there is no choice to send income to one beneficiary and capital to another;
• as there is no amendment required to the trust deed, if a trustee distributes elsewhere, the EET will be automatically revoked;
• in addition to being an eligible beneficiary under the trust deed, you won’t be able to nominate SMSFs, partnerships or companies with complex share rights; and
• you will be able to change the nominated beneficiaries in respect of death or relationship breakdown.

In respect of the latter:

• if you choose to restructure, then you’re locked out from making an EET election;
• if you have made an EET election, you’re locked out from relying on the new rollover; and
• if you restructure, you’re not allowed any material discretionary elements for four years post-transfer.

Why might clients be cautious about relying on the new regime?

So what do we think? Well, it’s too early to tell, but some preliminary views that support doing something other than relying on the new regime are:

• Trustee duties still matter
  Owies-type issues will become more prevalent. Just because you choose to make an EET election will not relieve a trustee of its obligation to properly exercise its duties and powers as a trustee of a discretionary trust.
• Potential fettering of trustee discretion
  Arguments regarding the fettering of trustee discretion will likely become more prevalent if there are no corresponding amendments to the trust deed.
• Trust and company interactions remain
  While an EET election provides relief from the 30% minimum rate of tax, unlike a non-fixed trust coming into a tax consolidated group where it is largely disregarded for tax purposes, you will still need to manage the reality of a trust interacting with a company (if a company is a nominated beneficiary).
• Existing restructuring pathways remain attractive
  While the new Subdivision 126-C rollover provides a path to restructure, there are already a number of ways to restructure from a trust to a company that do not have the same constraints. In that regard, duty effective and ABN retention restructures will still have primacy.

Are these reforms a complete solution?

Overall, for clients with more complex affairs and structures, these new options are unlikely to be panaceas for those wanting to achieve a genuine “corporatisation” of trust assets.

Traditional restructures have always needed to take into account tax, duty, commercial and trust law issues. The new regime only focuses on tax and forces clients into fixed entitlements.

At this stage, we remain cautious about the practical benefits of the regime and will have more to say once further legislative detail becomes available.

If you’d like to discuss how these changes may affect your trust structures, please get in touch with our Tax team.

The information contained in this article is general in nature and cannot be relied on as legal advice nor does it create an engagement. Please contact one of our lawyers listed above for advice about your specific situation.