Restructuring, Trust Tax Changes & Valuation
Recent and proposed trust tax changes have reduced the effectiveness of discretionary trusts as a tax planning structure. Legislative measures announced in the recent Federal Budget have progressed through the House of Representatives and remain before the Senate. As a result, while the rules are not yet enacted, the direction of change is clear.
These developments are prompting advisers and business owners to reconsider whether businesses and assets should continue to be held in discretionary trusts. Accordingly, many are exploring restructuring options, including transferring operations to companies or alternative entities. Where these transactions occur, tax rules generally require an objective market value. Therefore, valuation supports the restructure and provides a defensible basis for implementing change.
At Lotus Amity, we provide valuations to support these restructures and ensure that transactions reflect a consistent and supportable market position.
Background to the Trust Tax Changes
The recent measures focus on how income distributed by discretionary trusts is taxed and how existing structures operate in practice. In particular, the legislation targets arrangements involving corporate beneficiaries and the retention of profits within trust structures. As a result, distributions that previously achieved concessional outcomes may now attract higher effective tax rates.
In addition, the rules restrict arrangements that do not reflect ordinary commercial dealings. Consequently, structures that rely on income deferral or artificial distribution patterns may no longer operate as intended.
While the legislation remains subject to Senate approval, it is expected to apply from a future commencement date specified in the final law, typically aligned to the start of an income year. Accordingly, advisers are reviewing trust arrangements now to assess whether restructuring should occur before the new rules take effect.
What This Means for Business Owners
These changes affect how trust structures operate in practice. In particular:
- distributions may attract higher effective tax rates
- common structures using corporate beneficiaries may become less efficient
- existing arrangements may require review or restructuring
As a result, business owners must reassess both structure and ownership arrangements. Accordingly, any changes to assets or entities will often trigger valuation requirements.
Why Valuation Is Required
Trust restructuring often involves transferring assets, shares or business interests between entities. In these circumstances, tax rules require transactions to occur at market value. Accordingly, an independent valuation becomes necessary to support the transaction and demonstrate compliance. Valuation may be required where:
- a business transfers from a trust to a company
- assets move between related entities
- shares are issued or transferred as part of a restructure
- ownership structures are simplified or realigned
As a result, valuation plays a central role in implementing compliant restructuring strategies.
Common Trust Restructuring Scenarios
In practice, restructuring commonly involves a limited number of scenarios.
Trust to Company Restructure
Businesses may transfer operations or assets from a trust into a company structure. Accordingly, valuation determines the market value of the business at the time of transfer. This directly affects tax outcomes and future cost base.
Changes to Corporate Beneficiaries
Where existing structures rely on corporate beneficiaries, advisers may restructure those arrangements. As a result, transfers of interests or assets may occur, which require valuation to support the adopted position.
Internal Asset Transfers
Groups may consolidate or simplify structures by transferring assets between entities. Accordingly, each transfer must occur at market value and requires supporting evidence.
Approach to Valuation for Trust Tax Changes
We apply established valuation methodologies and align them with tax requirements.
Income Approach
We apply discounted cash flow or capitalisation methods where appropriate. Accordingly, this reflects expected future performance.
Market Approach
We assess comparable transactions and companies. As a result, this provides a market‑based reference point.
Cross‑Checks
Where relevant, we apply multiple approaches. Consequently, this strengthens the robustness of the valuation and improves defensibility.
ATO Expectations
The ATO expects valuations used for tax purposes to be objective, supportable and consistent with accepted standards. In particular, valuations should:
- rely on relevant and reliable information
- reflect conditions at the valuation date
- apply appropriate methodologies
- be capable of independent review
Accordingly, poorly supported valuations increase the risk of audit, adjustment or dispute.
Common Issues in Trust Restructure Valuations
In practice, issues often arise where valuation does not align with the transaction. Common issues include:
- unsupported assumptions or forecasts
- inconsistent treatment of related‑party transactions
- incorrect valuation dates
- failure to consider tax‑specific requirements
As a result, the ATO may challenge the valuation or substitute its own value. Therefore, a structured approach is critical.
How We Support Trust Restructures
We provide valuation services to support trust restructuring and compliance. Our work includes:
- preparing independent valuation reports for transfers and restructures
- determining market value for tax and stamp duty purposes
- supporting advisers in structuring transactions
- assisting in responding to ATO queries or reviews
Accordingly, our work ensures that restructures remain compliant and defensible.
Case Study — Trust to Company Restructure
A professional services business operating through a discretionary trust obtained an independent valuation as part of a proposed restructuring. The restructure involved transferring the business from the trust to a corporate entity to simplify ownership and align the structure for future growth.
Valuation Challenge
The restructure required a clear and supportable market value at the time of transfer. In particular, the valuation needed to:
- establish the market value of the business for transfer between entities
- support tax compliance for the restructure
- provide a defensible value for future transactions and reporting
In addition, the business had experienced changing revenue and margin conditions. Consequently, the valuation needed to reflect both current performance and future uncertainty.
Approach
We applied an income-based valuation approach, supported by market evidence. First, we assessed historical financial performance, including revenue growth and gross profit margins. We then modelled future cash flows under different scenarios to reflect uncertainty in performance. In addition, we:
- normalised earnings to reflect a commercial operating structure
- applied an appropriate discount rate to reflect business risk
- cross-checked outcomes using market-based multiples
This approach ensured that the valuation reflected both current conditions and expected future performance.
Outcome
The valuation established a market value range for the business and a concluded value for implementation of the restructure. As a result, the parties were able to transfer the business to the company at a supportable market value. This provided a consistent basis for tax compliance and future cost base calculations.
Importantly, the valuation aligned the restructuring transaction with market value principles. Accordingly, it reduced the risk of challenge and supported a defensible position for reporting purposes.
Relationship to Other Valuation Requirements
Trust restructuring valuations often overlap with broader valuation contexts. These include:
- tax and stamp duty valuations, where market value determines tax outcomes
- start‑up valuation for capital raising, where structures are reorganised before investment
- transaction valuations, where assets or businesses are transferred
Accordingly, valuation must remain consistent across these areas.
Frequently Asked Questions
Do the trust tax changes require a valuation?
A valuation is required where restructuring involves transferring assets or interests at market value
When should a valuation be obtained?
A valuation should be obtained before implementing restructuring to support the transaction position
What is the main risk?
The main risk is that the ATO does not accept the valuation, which may result in adjustments or penalties
Can I rely on an internal estimate?
Internal estimates carry significant risk. Accordingly, independent valuation provides stronger support
Important Information
Lotus Amity provides independent valuation services only. We are Chartered Accountants; however, we do not provide tax advice, legal advice or financial product advice. In addition, Lotus Amity does not hold an Australian Financial Services Licence (AFSL).
Accordingly, this material is general in nature and should not be relied upon as advice. You should obtain specific tax and legal advice before making decisions in relation to trust structures or restructuring.