The Federal Government has announced a significant proposed reform to the taxation of discretionary trusts, introducing a 30% minimum tax on discretionary trust income from 1 July 2028.

The changes are aimed at improving what the Government describes as the “fairness” of the tax system by reducing the tax advantages associated with discretionary trusts, particularly income splitting between family members on lower tax rates.

If you currently operate through a family or discretionary trust, it is important to understand how these proposed changes may affect you.

What is changing?

Under the proposal, trustees of discretionary trusts will be required to pay a minimum 30% tax on trust taxable income (unless a higher tax rate already applies).

Currently, trustees can distribute income to beneficiaries, who pay tax at their own marginal tax rates. This flexibility often allows families to reduce tax through income splitting.

From 1 July 2028, while trustees will still determine distributions and beneficiaries will continue reporting trust income in their personal tax returns, trustees will first pay a minimum 30% tax.

Individual beneficiaries (other than companies) will receive a non-refundable tax credit for tax already paid by the trustee.

In practical terms, this means trust income will generally no longer be taxed below 30%.

Why is the Government introducing this change?

The Government argues that discretionary trusts can create tax advantages not available to salary and wage earners.

According to Treasury, families using discretionary trusts have historically paid lower average tax rates than families with similar incomes who do not use trusts, primarily through income splitting.

The Government says the reform is intended to better align tax outcomes between trust income and employment income and improve long-term sustainability of the tax system.

Who may be affected?

The changes are expected to primarily affect:

      Family and discretionary trusts distributing income to low-income adult beneficiaries

      Trusts using “bucket companies” or corporate beneficiaries to defer tax

      Small business operators using discretionary trust structures for business activities

      Wealth accumulation and investment structures relying on tax-effective trust distributions

The Government estimates that around half of discretionary trusts may not be affected in any given year, particularly where beneficiaries already pay tax at rates of 30% or more.

What about small businesses?

Many small businesses operate through discretionary trusts for asset protection and succession planning purposes.

To assist with transition, the Government proposes expanded rollover relief to allow restructuring into alternative entities such as:

      Companies

      Fixed trusts

The relief is intended to avoid immediate tax consequences, including capital gains tax, for eligible restructures.

This concession is proposed to be available for three years from 1 July 2027.

Businesses restructuring into a company may also benefit from:

      Access to the lower 25% corporate tax rate (subject to eligibility)

      Simpler profit retention

      Easier financing and equity arrangements

      Dividend imputation benefits

Which trusts are excluded?

The proposed minimum tax will not apply to several trust categories, including:

      Fixed trusts

      Widely held trusts

      Complying superannuation funds

      Special disability trusts

      Deceased estates

      Charitable trusts

Certain income types may also be excluded, including:

      Primary production income

      Certain income relating to vulnerable minors

      Income already subject to non-resident withholding tax

      Existing testamentary trust assets

What should trustees do now?

At this stage, the proposal remains subject to consultation and legislation.

However, trustees and business owners should begin reviewing:

✓ Current trust distribution strategies

✓ Use of corporate beneficiaries (“bucket companies”)

✓ Whether an alternative structure may be more suitable in future

✓ Long-term succession and tax planning arrangements

For many clients, there may be no immediate action required. However, understanding the potential impact early can help avoid rushed restructuring decisions later.

Key dates

1 January 2027 –   Small business support services expected to commence

1 July 2027         –   Proposed rollover relief period begins

1 July 2028         –   Proposed 30% minimum tax on discretionary trusts commences

Please contact us directly if you need any help with this.

(Source: Information extract from The NTAA Express)