The Federal Government has released draft legislation proposing a 30% minimum tax on discretionary trusts from 1 July 2028. The changes are not yet law, but they could have a significant impact on families and business owners who use trusts.
What’s the difference?
Currently, family trusts can distribute income to family members who may pay less tax, but under the proposed changes, trust income would generally be taxed at a minimum of 30%, even if the family member normally pays a much lower tax rate.
The good news is that existing trusts may have a choice.
Option 1: Retain Flexibility and Accept a Minimum Tax Rate
A trust could continue operating as a discretionary trust, allowing the trustee to determine how income is distributed among eligible beneficiaries each financial year.
However, this flexibility could come at a cost.
The proposal describes a minimum tax rate of 30%, potentially affecting the tax efficiency of distributions.
Individual beneficiaries might receive a credit for tax already paid by the trust, while distributions to corporate beneficiaries could be treated differently.
For families and businesses that regularly distribute trust income to companies, this could have significant tax implications.
Option 2: Fix Beneficiaries and Their Entitlements
An alternative described in the proposal would allow existing discretionary trusts to elect to fix their beneficiaries and their respective entitlements to income and capital.
For example, a family trust might nominate:
Parent 1: 50% entitlement
Parent 2: 50% entitlement
In exchange, the trust could potentially avoid the proposed minimum 30% tax treatment.
However, the trade-off would be substantial: the trust would largely surrender its ability to vary distributions in future years.
Departing from the nominated arrangements could also trigger adverse tax consequences, including potentially higher tax rates and restrictions on future elections.
Why Does This Matter for Families and Business Owners?
One of the main advantages of a discretionary family trust is its flexibility.
For example, a trustee may decide to distribute more income to one spouse in a particular year or make distributions to eligible adult children as their financial circumstances change.
This flexibility can be valuable for family tax planning, business succession and wealth management.
Under the fixed-entitlement option described in the proposal, families could lose much of that flexibility.
There would also be important considerations for future generations. If beneficiaries and their entitlements had to be permanently nominated, including children or grandchildren in future distributions could become more complicated.
These issues highlight why any proposed changes to discretionary trusts would require careful consideration.
Could Restructuring Be an Option?
The proposal also describes a potential transitional rollover period between 1 July 2027 and 30 June 2030.
This would potentially allow eligible discretionary trusts to transfer certain assets into alternative structures, such as companies or fixed trusts, without immediately triggering capital gains tax.
However, restructuring a trust is rarely straightforward.
Even where capital gains tax rollover relief is available, other matters may need to be considered, including:
State-based transfer duty
GST implications
Legal and administrative costs
Asset protection
Succession planning
The long-term tax consequences of the new structure
A restructuring decision should always be based on the family’s broader circumstances rather than tax considerations alone.
What Should Family Trust Owners Do Now?
There is no reason to rush into restructuring an existing family trust based on unverified legislative proposals.
Nevertheless, reviewing your trust arrangements periodically is good practice, particularly where your family circumstances, business activities or financial objectives have changed.
Some useful questions to consider include:
How important is the flexibility to distribute income among different family members?
Have trust distributions remained relatively consistent, or do they change each year?
Does the trust regularly distribute income to a corporate beneficiary?
Are there children, grandchildren or other family members you may wish to benefit in the future?
Would a different ownership structure better support your long-term objectives?
Final Thoughts
Family trusts can offer significant advantages, but their effectiveness depends on the circumstances of each family or business.
If changes of the kind described above were ever introduced, the key consideration would not simply be how to minimise tax. It would also be about balancing tax efficiency, flexibility, asset protection and long-term family planning.
At All Square Accountants, we help families and business owners understand their trust structures, review their tax planning strategies and make informed decisions about their financial future.
If you would like to review your existing family trust arrangements, contact our team to discuss your options.
