The Government has introduced a bill to add a 30% minimum tax on discretionary trusts.
The minimum tax was first announced when the Federal Budget dropped in May.
Discretionary trusts can be used to minimise the amount of tax paid, and the changes are expected to limit how much a family can save.
Here is how it affects you.
Trusts
A trust is a way of holding assets (like money, property, shares or a business) on behalf of other people.
The person (or company) in charge is called the trustee and the people who benefit are called beneficiaries.
People use trusts for a variety of reasons, including to get tax benefits, protect assets if someone goes bankrupt, or manage money for people who can’t do it themselves (for example children).
Discretionary trusts
In a discretionary trust, the trustee gets to decide how much and who receives income from the trust every year.
Trust distributions are taxed at each beneficiary’s personal income tax rate, so the trustee can direct more money to lower earners and shrink the overall bill.
To see how this works, let’s look at a family with a parent who owns a business, a partner that works part-time, and three adult children who are studying.
The trustee splits the business income across family members.
The family tax bill drops by $77,890.
Proposed changes
From 1 July 2028, discretionary trusts will have to pay a minimum tax of 30% on their income.
The tax is paid by the trustee before the money goes out to the beneficiaries.
Beneficiaries on a tax rate higher than 30% will pay the difference in taxes.
For example, if $100 of trust income goes to a beneficiary on a 37% tax rate, the trust pays $30 in taxes, and the beneficiary will pay $7.
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However, a beneficiary on a tax rate lower than 30% won’t get a refund for the extra tax paid.
The family tax bill now drops by $41,890.
According to the Federal Treasury, around 350,000 active small businesses operate through a discretionary trust.
Families who are affected can either switch to a different setup (like a company) or lock in upfront who gets paid and how much going forward, to avoid the minimum tax.
Some trusts, like those set up through a will, are excluded.
Treasurer Jim Chalmers said the changes to discretionary trusts are designed to “better [align] the tax rate on trust income with tax rates paid by workers.”
Response
In an interview with ABC Radio National, Shadow Treasurer Tim Wilson stated that the Government “really need[s] to abandon” the changes.
Wilson argued that tax minimisation isn’t the reason why small businesses use trusts, and the changes had “no consultation, it did not get taken to an election, and it’s going to cause chaos for financing of small businesses into the future.”
Treasury held consultations, though only after the Budget was released.
Impact
The Government says more than 95% of taxpayers and more than 90% of small businesses won’t be affected in any given year.
If you are a beneficiary of a discretionary trust and you’ve been receiving money from it, that could change.
If the bill passes, from July 2028, you’d no longer get the tax benefit of being on a lower rate, so families may restructure their tax arrangements in response.
What’s next
The bill to add the minimum tax was introduced in Parliament today.
Details of the bill may change before it becomes law.
The Coalition opposes the bill, so the Government will need the Greens’ support to pass it in the Senate.
The Greens want changes and have called for a Senate inquiry.
