The Federal Budget announced a proposed new 30% minimum tax on discretionary trust income from 1 July 2028. Under the proposed changes, trustees would pay a minimum 30% tax on trust income, with beneficiaries receiving non-refundable tax credits for tax already paid by the trust. The Government has stated the measure is intended to improve fairness in the tax system.
This is significant because discretionary trusts are currently generally taxed by distributing income to beneficiaries, who then pay tax at their own marginal tax rates. Under the proposed model, a minimum level of tax would apply at the trust level instead. This may reduce some of the tax flexibility historically associated with discretionary trusts, particularly for family businesses, property investors and small business owners.
A discretionary trust is a legal structure where a trustee holds and manages assets on behalf of beneficiaries. The trustee generally has discretion to decide which beneficiaries receive income or capital from the trust, and how much each beneficiary receives. These structures are commonly used for asset ownership, investment purposes, tax planning and succession planning, and are often seen in investment property lending, SME lending, commercial lending and asset finance structures.
The proposed changes are intended to apply to discretionary trusts only. The Budget indicates they would not apply to fixed trusts, complying superannuation funds, deceased estates or charitable trusts. However, there may still be uncertainty around how some trust structures are classified under the new rules, so clients using trust structures should seek accounting and legal advice before making decisions.
The proposed 30% minimum tax is scheduled to commence from 1 July 2028. The Government has also announced transitional rollover relief from 1 July 2027 for businesses and others that choose to restructure out of discretionary trusts into other entity types, although the detailed design has not yet been finalised. Anyone who owns property, operates a business or borrows through a discretionary trust should seek professional advice before restructuring or making new investment decisions.
Important disclosure: This article contains general information only and has been prepared without taking into account your individual objectives, financial situation or needs. It should not be relied upon as personal financial, tax, legal or credit advice. Before making any decision in relation to trusts, taxation, business structures, property or lending matters, you should consider whether the information is appropriate for your circumstances and seek advice from a qualified accountant, tax adviser, solicitor, financial adviser and/or licensed credit adviser.