Discretionary trusts: What the proposed changes mean

Treasury estimates there are approximately 840,000 discretionary trusts in Australia and around 350,000 active small businesses operating through these structures.ⁱⁱ

The proposal, outlined in a consultation paper, is that from 1 July 2028, trustees will pay 30 per cent tax at trust level before distributions to beneficiaries.ⁱⁱⁱ

Because the trustee-paid tax credits would be non-refundable, individual and other non-corporate beneficiaries generally would not be able to reduce the tax on discretionary trust income below 30 per cent, even if their personal tax rate is lower.

Proposed exemptions

A number of entities are exempt, with fixed and widely held trusts, complying superannuation funds, charitable trusts, deceased estates and special disability trusts, all excluded. Testamentary trusts established for genuine testamentary purposes are also exempt.

Certain types of income (such as primary production income, select income for vulnerable minors and amounts already subject to non-resident withholding tax), are also excluded from the new rules.

Until the final legislation is released, key questions are yet to be clarified about calculation of taxable income, treatment of capital gains, franking credits and carried-forward losses.

Trustee-level tax changes the mechanics

Under the proposed rules, trustees would pay the 30 per cent tax upfront and beneficiaries would receive a tax credit for their share of that tax. Beneficiaries would still need to include their trust income in their tax returns, but the way the tax is collected would change.

Trustees will be required to calculate, report and pay the minimum tax and notify beneficiaries of their entitlements and associated tax credits.

Tax offsets for beneficiaries

Individual and other non-corporate beneficiaries will receive a non-refundable tax offset for the tax paid by the trustee and will be required to declare their trust income in their tax return.

Corporate beneficiaries, however, will not be able to claim credits for tax payable by the trustee. This is designed to ensure the minimum tax cannot be avoided by cycling income through a ‘bucket’ company set up simply to receive discretionary trust distributions.

As currently proposed, distributions to corporate beneficiaries could be subject to tax at both the trust and company level because corporate beneficiaries would not receive a tax credit for trustee-paid tax. Treasury is still consulting on aspects of this treatment.^iv

Restructure options

For small businesses and other taxpayers wishing to restructure out of a discretionary trust into another arrangement, expanded relief from income tax consequences (including capital gains tax) will be available for three years from 1 July 2027 to 30 June 2030. The relief is an expanded version of the existing Small Business Restructure Roll-over.^v

For small businesses wishing to reduce the impact of the new rules, there are other alternatives to consider, including employing beneficiaries working in the business rather than paying them trust distributions. Salary or wage payment to employees will not attract the minimum tax.

Restructuring into a company would allow you to access dividend imputation and the lower 25 per cent corporate tax if your aggregated annual turnover is less than $50 million.

What are the implications?

While no immediate action is recommended before the legislation is finalised, business owners and investors should begin assessing how the proposal could affect their current structure and whether alternative arrangements may be worth considering.

For many families, discretionary trusts will continue to provide valuable asset protection and succession planning benefits, even if some of their tax advantages are reduced.

If you would like help understanding how the new rules will affect your trust, contact our office today.

Comparison of tax outcomes for different business structures

The following example, taken from Federal Budget papers, shows how the proposed minimum tax could change the relative attractiveness of discretionary trusts compared with companies.

In 2028–29, Kurt and Loretta each earn $300,000 operating small businesses.

Loretta provides her services through a company. Loretta pays herself a salary as an employee of $100,000 and retains the remaining income in the company to build the business.

The company pays the small business rate of 25 per cent on this profit. Overall, $72,002 of tax will be paid.

Kurt provides his services through a family discretionary trust with himself as the trustee. The trust pays Kurt a salary of $100,000 as an employee and has remaining taxable income of $200,000. Kurt makes four of his extended family members, who have no other income, each entitled to $50,000, while retaining the money in the trust to build the business. In total, Kurt’s family will pay $42,010 in tax.

With a minimum tax in place, the trust would pay 30 per cent tax on the $200,000 of income not paid as wages, regardless of how this income was distributed. Overall, $86,002 of tax will be paid if Kurt does not change the distributions made to his family members.

By accessing the small business tax rate, Kurt would pay less tax operating through a company than a trust once the minimum tax is in place.

Source: Budget 2026-27 factsheet

i Tax reform | ATO
ii Minimum tax on discretionary trusts factsheet | Federal Budget papers
iii Minimum tax on discretionary trusts | Consultation Paper
iv Deloitte | tax@hand
v Small business restructure roll-over | ATO