Proposed trust tax reforms: Structuring considerations, opportunities and risks

Australia’s proposed trust tax reforms could fundamentally change how advisers structure client affairs. While trusts may become less attractive for tax planning purposes, their asset protection benefits remain significant. The reforms also raise important questions around franking credits, dividend-only shares and the use of companies in investment structures. As legislation develops, advisers and clients will need to balance new structuring opportunities against the policy intent of the reforms.

In addition to working out our new year’s tax resolutions, many of us have well and truly started to digest the Budget announcements, with the benefit of the explanatory memorandum and legislation. This, coupled with clients already seeking solutions, has put pressure on advisers to come up with ideas to manage the impact of the changes.

How could the proposed changes affect future structures?

How trusts are to be taxed is a fundamental change that will see a dramatic shift in how we structure clients’ affairs. The proposed minimum rate of tax, how it will interact with franking credits and the use of corporate beneficiaries will absolutely change a new client set up. Looking ahead, it is very likely that we will see companies being established where the ordinary shares continue to be held by trusts, with class or dividend-only shares held by individuals instead.

Some immediate thoughts on this: while trusts might have lost some of their appeal for tax planning purposes, they continue to be the only vehicle for providing genuine asset protection. Nothing in the new proposals suggests that individuals cannot still control a trust without owning it; a critical issue when considering an individual’s insolvency. This reason alone provides a compelling argument for why the ordinary shares in a company (where all the inherent value resides) should continue to be owned in an asset-protective vehicle.

Franking credits and the role of dividend-only shares

Until there is a change to the refundability of franking credits, clients will still want the opportunity to access this outcome. At this stage, it is likely that franking credits received by a trust would be used to offset the trustee’s liability for its minimum rate of tax and be exchanged for non-refundable credits that would flow through to the ultimate beneficiary.

It is for this reason that class or dividend-only shares ought to be held by individuals (and be redeemable on their terms). The reasoning is twofold. As asset protection continues to be a relevant consideration for clients, shares that are owned personally should have limited rights. Being redeemable on their terms means they can be dealt with more easily than ordinary or class shares, which are required to be dealt with under the more formal mechanisms of the Corporations Act. It is also very helpful when assessing eligibility for small business concessions.

There will be an obvious desire to issue dividend-only shares from companies that currently have their ordinary shares held by trusts and carry significant retained profits. The usual warnings apply: value shifting, debt/equity rules, dividend streaming and Part IVA, just to name a few.

Negative gearing strategies under the proposed reforms

We are also being approached with queries on negative gearing strategies—the obvious example being the purchase of residential property in a company where the underlying shares are being leveraged. Unlike unit trusts, there is no look-through provision in the Treasury Laws Amendment (Tax Reform No. 1) Bill 2026 (Bill). Nor is there a specific anti-avoidance provision contained in the Bill.

While it appears doable under the Bill, there are some standout issues associated with such a strategy. The first is that it runs contrary to the policy intent of the amendments, which is never a good start to a strategy. There is a nexus required for the Bill to operate, being deductions that ‘relate to’ residential holdings. The argument for the clients is that the borrowings would ‘relate to’ the acquisition of shares and not the residential property. The Commissioner would likely counter that it ‘relates to’ residential property given the Bill encompasses indirect connections. The client would then counter that only unit trusts are caught, and companies are not, given that only unit trusts are mentioned in the express look-through (section 26-155(7)).

That may be the case, though the EM (at paragraph 1.221) flags that there will be additional law to follow the ‘first tranche of changes’ that may specifically address this type of structure. There is also the clear policy intent of the amendments to limit leveraged investment in residential property, which the Commissioner would rely upon in both interpretive and anti-avoidance arguments.

Opportunity should not outweigh caution

So, is this a strategy worth pursuing? We don’t think so.

There will definitely be opportunities to structure and restructure clients to manage the change in law, but we suggest that a flurry of activity in an effort to see clients keep doing what they have always done is not the way to go.

The proposed reforms are complex, and the practical implications will vary depending on individual circumstances. If you would like to discuss how the changes may affect your structures or future plans, please get in touch with Macpherson Kelley’s 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.