Key Takeaways
- From 1 July 2028 discretionary trusts will face a 30 % minimum tax on all income earned inside the trust, with the tax paid by the trustee before any distribution.
- Individual beneficiaries (but not corporate ones) will receive a non‑refundable tax credit for the tax paid by the trust, mirroring the franking‑credit system for companies.
- The measure is projected to raise ≈ $4.47 billion in its first full year, helping to fund the government’s new $250 personal‑income‑tax cut.
- The policy targets the widespread use of trusts for income splitting; families in the top‑10 % of earners currently capture about 90 % of private trust wealth and enjoy an effective tax rate roughly 4 percentage points lower than comparable non‑trust households.
- Certain trusts are exempt – fixed testamentary trusts, compliant superannuation funds, special disability trusts, charitable trusts, and specific income types (primary‑production, vulnerable‑minor, non‑resident withholding).
- A three‑year rollover relief window (1 July 2027 – 30 June 2030) allows trustees to restructure into companies or fixed trusts without immediate adverse tax consequences, supported by guidance from the Australian Small Business and Family Enterprise Ombudsman and ASIC.
- Experts anticipate significant restructuring of trusts, with many small businesses likely migrating to corporate structures to retain dividend imputation and the lower 25 % corporate tax rate (subject to turnover and passive‑income thresholds).
- The change will interact with the ongoing capital‑gains‑tax (CGT) discount reform, potentially increasing the effective tax rate on post‑2027 growth of assets held in trusts, including pre‑1985 farmland that will now become subject to CGT on post‑2027 appreciation.
- While the reform aims to “level the playing field” between trust income and wage income, critics warn it could disproportionately affect ordinary family businesses, succession planning, and younger Australians building wealth through trusts.
Overview of the New Trust Tax
Starting 1 July 2028, the federal budget introduces a 30 % minimum tax on all income generated inside a discretionary (family) trust. The trustee must pay this tax out of the trust’s earnings before any distribution is made to beneficiaries. Unlike the current system, where trust income can be distributed to low‑tax‑rate family members and taxed at their marginal rates, the new rule forces a baseline taxation level that aligns trust‑derived income more closely with the tax paid on ordinary wages. The policy applies to every discretionary trust regardless of size, marking a sweeping shift in how trust income is treated for tax purposes.
Rationale and Government Justification
Treasury analysis shows that families using discretionary trusts enjoy an average tax rate about 4 percentage points lower than similarly‑income families that do not use a trust. Over the past two decades the number of discretionary trusts has doubled, distributing $142.4 billion in income to beneficiaries in the 2023 tax year alone. Approximately 90 % of private trust wealth is held by the wealthiest 10 % of households (net worth above $2.3 million). The government argues that the measure will level the playing field, ensuring that trust income is taxed at a rate comparable to the 30 % marginal rate faced by wage earners on incomes between $45,001 and $135,000, thereby reducing preferential tax treatment for high‑wealth families.
Mechanics of the Minimum Tax and Credits
Under the new regime, the trustee calculates the trust’s taxable income and applies the 30 % minimum tax. The tax is remitted to the Australian Taxation Office (ATO) before any distribution. Individual beneficiaries (natural persons) receive a non‑refundable credit equal to the tax paid by the trust, which they can claim on their personal tax returns to offset other tax liabilities. Corporate beneficiaries do not receive such a credit, meaning distributions to companies risk double taxation—first at the trust level (30 %) and again when the company distributes profits to its shareholders. This mirrors the franking‑credit system for companies but is limited to individual recipients.
Impact on Income Splitting and Trust Use
One of the primary attractions of discretionary trusts has been the ability to split income among family members to exploit lower marginal tax rates and tax‑free thresholds. By imposing a floor of 30 %, the reform removes the tax advantage of distributing income to beneficiaries whose marginal rate falls below this threshold. Consequently, families will find it less beneficial to allocate trust income to children or low‑earning spouses solely for tax savings. The change is expected to diminish the attractiveness of trusts as a vehicle for income splitting, prompting trustees to reconsider how and to whom they allocate earnings.
Revenue Projections and Funding
The budget estimates that the new minimum trust tax will generate approximately $4.47 billion in its first full year of operation (2028‑29). This revenue is earmarked to help finance the government’s broader tax‑relief package, including a $250 personal‑income‑tax cut for low‑ and middle‑income earners. The projection assumes that the majority of trusts will continue operating under the new rule, with only a portion opting for restructuring during the relief period. The figure underscores the fiscal significance of the measure, positioning it as a substantial source of offsetting revenue.
Exemptions and Rollover Relief
Not all trusts are subject to the new minimum tax. Exemptions include fixed testamentary trusts (established via a will), compliant superannuation funds, special disability trusts, and charitable trusts. Additionally, certain income streams—such as primary‑production earnings, payments relating to vulnerable minors, and amounts subject to non‑resident withholding tax—are excluded from the 30 % floor. To ease the transition, the government will provide a three‑year rollover relief window from 1 July 2027 to 30 June 2030, allowing trustees to transfer assets out of discretionary trusts into companies, fixed trusts, or other structures without triggering immediate capital gains tax (CGT) or stamp‑duty liabilities. The Australian Small Business and Family Enterprise Ombudsman and ASIC will offer guidance and procedural support during this period.
Effect on Small Businesses and Family Enterprises
Approximately 350,000 active small businesses operate through discretionary trust structures. For many of these enterprises, trusts provide flexibility in profit distribution, succession planning, and access to the 50 % CGT discount. The new tax, combined with the rollover relief, may prompt a notable shift toward corporate forms, especially where businesses can benefit from the lower 25 % corporate tax rate (available to entities with aggregated turnover under $50 million and limited passive income) and the dividend imputation system. However, advisers warn that restructuring costs—legal, accounting, and potential stamp duty—could be prohibitive for smaller operators, potentially leaving some businesses disadvantaged if they cannot migrate efficiently.
Interaction with the CGT Discount and Asset Taxation
The trust tax reform coincides with proposed changes to the capital‑gains‑tax discount. Treasury notes that post‑1 July 2027 growth in assets held within trusts will be brought into the CGT framework, meaning any appreciation—including on property acquired before 19 September 1985—will now be taxable upon disposal. For farms and family‑owned land that have remained unchanged since the mid‑1980s, this represents a material shift: previously exempt pre‑CGT assets will become subject to tax on post‑2027 gains. The measure thus raises the effective tax rate on capital gains held in trusts, further eroding one of the key benefits that has driven trust popularity.
Broader Economic and Distributional Implications
By targeting a vehicle that disproportionately benefits high‑wealth families, the policy aims to reduce horizontal inequity in the tax system. Yet stakeholders warn of unintended consequences: the reform may affect ordinary family businesses, impede succession planning, and disproportionately impact younger Australians who have used trusts to accumulate assets for home purchases or long‑term security. The emphasis on crediting only individual beneficiaries could also encourage a shift toward personal ownership of income‑generating assets, potentially simplifying structures but increasing administrative burdens for individuals. Ultimately, the success of the measure will hinge on how effectively the rollout relief mitigates transition costs and whether the anticipated revenue aligns with behavioral responses from trustees and beneficiaries.