What was announced?
The government has unveiled their plan to ensure that income flowing through trust structures faces a minimum effective tax rate of 30%. The Budget announcement was squarely aimed at discretionary trusts often used by family groups and small businesses for income splitting and asset protection purposes. Under current law, trust distributions are taxed in the hands of beneficiaries at their individual tax rates. This allows trustees to allocate income to members of a family group who might be in lower tax brackets (e.g., all those adult children in full time study with little to low income taxed at 0% or 19%), thereby reducing the overall tax paid by the family group.
It would appear the days of old are gone. Regardless of a beneficiary’s personal marginal rate, the Budget proposes any distribution from a trust will incur at least 30% tax. If the beneficiary is already in a higher tax bracket, they continue to pay their higher rate as if nothing has happened. But if their normal rate is below 30%, they would not get a refund for the tax paid by the Trustee as the Trustee tax is going to be non-refundable. This effectively sets a floor of 30% on trust income taxation going forward. The added kick in the guts – any benefit of tax paid at the trustee level on such distributions, are non-refundable in the hands of non-corporate beneficiaries.
In an attempt to soften the blow, the government has also proposed an expanded rollover relief for three years from 1 July 2027. This allows discretionary trust assets to be transferred into other entities (e.g. companies) without triggering immediate tax implications (including capital gains tax). Although touted as a way to help small businesses and family groups restructure out of discretionary trusts if they choose, the end result will be what the government has always wanted – minimum tax of 30% achieved via a company structure or tax at top marginal rates as sole operators or partnerships.
Acknowledging the complexity of these changes, the government has slated commencement of the trust minimum tax to be from 1 July 2028. As it is not yet law and still expected to go through extensive consultation process, we shouldn’t panic just yet. Any legislation would not likely be introduced until 2027 and refinement of scope (for instance, whether certain trusts are excluded) is still possible.
In the meantime, Moore Australia is here to explain what we know so far and to provide some practical tips for dealing with the uncertainty this proposed change brings.
Who is not impacted by these changes?
Fixed trust and widely held trusts (including fixed testamentary trusts), complying superannuation funds, special disability trusts, deceased estates and charitable trusts are not subject to these new rules. Unit Trusts may not necessarily be safe from these changes because the announcement specifies these changes do not impact fixed trusts and depending on the terms of the deed of a Unit Trust, they may not necessarily be considered a fixed trust.
Certain types of income such as primary production income, certain income relating to vulnerable minors, amounts to which non-resident withholding tax applies, and income from assets of discretionary testamentary trusts existing at the time of the announcement will also be excluded.
Who could it affect the most?
All discretionary trusts. Particularly, those family run discretionary trusts that have been routinely distributing income to adult family group members in lower tax brackets (e.g., young adults, retired parents, etc.) to minimise the family group’s overall tax position. These are common among SMEs, and investment trusts regularly used by families. Such trusts will face higher tax obligations and potentially more compliance steps to calculate and remit the minimum tax. Professional service firms operating via trusts (where income might have been split among partners’ family members) will also feel the effect, as will trusts for investment portfolios that were splitting interest or dividend income.
Most impacted will be corporate beneficiaries who will not benefit from any tax offset in respect of the minimum tax paid by the Trust which will essentially result in double taxation leading to an effective tax rate of either 55% or 60% on distributions from trusts to companies. This change will make it ineffective to distribute to companies in the future purely from a tax perspective and the eventual decision in Commissioner of Taxation of the Commonwealth of Australia v. Bendel & Anor will have no significant bearing on the matter of whether trust entitlements left owing to corporate beneficiaries’ triggers Division 7A in the future.
Loss trusts will be particularly affected by the proposed regime. Where one discretionary trust within a family group has carried forward losses and receives income from another trust, the distributing trust will still be liable for the 30% minimum tax at the trustee level. Any non refundable tax credit passed to the loss trust is likely to be ineffective, as the recipient trust may have no tax liability once its losses are applied. In practical terms, trust losses will remain quarantined within the trust in which they arise, and distributing income to a related loss trust will no longer mitigate the 30% tax impost. The Budget materials contain no carve outs or special rules to address this outcome, suggesting it is a deliberate design feature. By contrast, corporate groups operating under the tax consolidation regime can offset losses across group members, the proposed trust minimum tax provides no equivalent form of ‘family group’ loss relief.
The biggest winner from these changes is the Australian Taxation Office (ATO) who have tried to apply various anti avoidance provisions on Trusts over the last few years without much success and by implementing a minimum 30% tax on distributions and taking corporate beneficiaries out of the equation in the future, tax collection will be simpler and not subject to long drawn out legal battles around different technical positions.
Practical implications for affected taxpayers
Worked Example
Let’s hypothesise that the Smith Family Trust has $100,000 of distributable income in FY26. Under current practice, the trustee distributes:
- $50,000 to Daughter (an adult university student with minimal other income); and
- $50,000 to Father (who has other income putting him in the top tax bracket).
Current position
- Daughter pays tax on $50,000 at individual rates. With the tax-free threshold and low brackets, her tax on the distribution will be approx. $5,800 (excluding Medicare) resulting in an effective rate of approx. 11.7%.
- Father pays top marginal rate 47% on his $50,000, approx $23,000 (excluding Medicare).
- Total tax paid by the family on the $100k is approx. $29,000.
Proposed position
- Daughter’s distribution could now incur a minimum $15,000 tax (30%). This is an approx. additional $9,000 in top-up tax to reach the 30% floor.
- Father’s distribution remains taxed at 47% as the proposed minimum tax doesn’t change his portion.
- Total tax paid by the family on the $100k could be approx. $38,000.
All still hypothetical until draft legislation is released but, in simple terms, a very different landscape for affected taxpayers.
From Treasury’s perspective, this is exactly what was intended. It is no secret the ‘discretionary’ nature of discretionary trusts has been a bee in the government’s bonnet for some time. The budget announcement specifies the Trustee will pay a minimum 30% tax on the distribution making it easier for the tax collection to happen at the time of the lodgement of the Trust tax return as opposed to waiting for beneficiaries to lodge their tax returns.
What we do know is that, in practice, family groups will face higher tax bills on trust-distributed income. Trustees might respond by changing their distribution strategies by distributing more to members already on high tax rates (since they’re paying above 30% anyway) or potentially choosing to accumulate income currently subject to the highest marginal tax rate. Some might consider different structures like converting to a company structure since the trust’s tax flexibility is nullified by this proposal but that raises other questions and tax implications around trust losses, elections and duty exemptions that the budget changes are silent on.
What next?
With a long lead time until 2028, there is an opportunity to review current trust structures and strategies:
- Model the impact – discretionary trusts should calculate how much extra tax would be payable if the changes were in effect on recent distributions to identify how much income has been benefiting from <30% rates. Additionally, commencing preliminary considerations as to how a potential restructure could operate would also be worthwhile. Remember, a restructure could have other legal or commercial implications that may be deal breakers.
- Wait for the detail – It’s crucial not to take drastic action until this legislation is passed. The proposals could be amended or not passed at all. For now, the prudent step is to flag this coming change and ensure awareness of what the outcomes could be.
- Be ready to pivot if necessary – we will need to see further details around what rollovers the Government will introduce but we would expect this would need to be very broad to ensure various trust structures can move towards a corporate model and hopefully, stamp duty exemptions will be provided as well in due course. Getting advice and working with your advisors will be imperative.
The trust minimum tax proposal marks a significant change in Australia’s tax landscape, especially for private clients and family businesses. They may aim to address broader political and economic goals but come with practical consequences. We recommend taxpayers affected by these proposals to plan instead of panic. Moore Australia will continue to monitor these developments and provide guidance to help taxpayers navigate the new tax rules with confidence and clarity.
