Why trusts are in the Government’s crosshairs

Australia has more than one million trusts, around 840,000 of which are discretionary trusts – a number that has doubled since 2001. In 2022-23 alone, discretionary trusts distributed $142.4 billion in income. The Government’s position is that this growth has been driven substantially by the tax advantages trusts offer, particularly the ability to split income among beneficiaries with lower marginal tax rates – an option unavailable to ordinary wage earners.

Treasury analysis shows that families using discretionary trusts pay an average tax rate around 4 percentage points lower than families with similar incomes who do not use a trust. The proposed minimum tax is designed to bring the effective tax rate on trust distributions closer to the 30 per cent marginal rate paid by workers earning between $45,001 and $135,000.

How the proposed 30 per cent minimum tax works

From 1 July 2028, the trustee of a discretionary trust – not the beneficiaries – will be responsible for paying a minimum 30 per cent tax on the trust’s taxable income. 

Trustees continue to determine which beneficiaries are entitled to trust income each year, and beneficiaries continue to include their distributions in their own tax returns. 

However, non-corporate beneficiaries will receive non-refundable tax credits for the minimum tax already paid by the trustee.

The practical effect is that trust income cannot be taxed at a rate lower than 30 per cent, regardless of how it is distributed. For beneficiaries already on a marginal tax rate of 30 per cent or above, there will be no overall increase in tax paid – the minimum tax simply removes the ability to distribute to lower-rate beneficiaries to reduce the overall tax outcome.

Corporate beneficiaries are treated differently. They will not receive non-refundable credits for the tax paid by the trustee – a deliberate design choice to prevent the minimum tax being circumvented by distributing income to a ‘bucket’ company and then accessing those credits as refundable franking credits.

Who is exempt

The minimum tax will not apply to all trusts, and the exemptions are meaningful. Fixed trusts and Fixed testamentary trusts are exempt. Discretionary testamentary trusts established prior to Budget night (12 May 2026) are exempt. Deceased estates, special disability trusts, charitable trusts, and complying superannuation funds are all excluded.

Certain types of income are also exempt regardless of trust type. Primary production income is excluded – relevant for farming families using discretionary trusts to hold agricultural operations. Income relating to vulnerable minors, and amounts to which non-resident withholding tax applies, are also exempt.

Importantly for agribusiness clients, the primary production income exemption means farming families will not see agricultural earnings caught by the 30 per cent floor. The detail of how this exemption interacts with trusts holding a mix of agricultural and non-agricultural income will be subject to further consultation as legislation is developed.

The rollover relief window and restructuring considerations

Rollover relief – including CGT rollover relief – will be available for three years from 1 July 2027, allowing trustees who wish to restructure out of a discretionary trust into a company or fixed trust to do so without triggering income tax or capital gains tax consequences. 

This window provides time to consider whether the trust structure still serves its purpose under the new rules and to make changes without a tax cost on the transfer of assets.

It is worth noting that depending on the type of trust, there may be practical restrictions on moving assets out. Certain trust deeds may limit the ability to transfer assets or wind up the trust, and transferring assets out of a trust – even with rollover relief available – can still have implications that require careful coordination across your financial adviser, accountant, and solicitor before any decisions are made.

The timeline and what to consider now

The legislation is still a proposal that will need to pass Parliament. At the time of writing, the minimum tax is not earmarked to begin until 1 July 2028.

The three-year rollover relief window begins from 1 July 2027 – a year before the tax takes are proposed to take effect – so any restructuring decisions benefit from planning that starts well before that date.

Right now, it is worth being aware of how the income is currently distributed across your trust’s beneficiaries, and what are their marginal rates? 

Until this change is legislated, we don’t have certainty on how the measures will be implemented. If you would like to start a conversation to understand your structure and potential impact, we are here to work through it with you. Book a 15-minute chat with our team.