Australia’s New 30% Minimum Tax on Discretionary Trusts Starts in 2028

Australia will soon change how it taxes discretionary trusts. Starting July 1, 2028, a new 30% minimum tax will apply to these trusts. This move aims to stop families and businesses from splitting income to pay less tax.

The change comes from the 2026-27 Federal Budget. Trustees of discretionary trusts must pay at least 30% tax on the trust’s taxable income. This applies unless a higher rate is due. Beneficiaries still report the income on their own tax returns. Non-corporate beneficiaries get non-refundable tax credits for what the trustee pays. Corporate beneficiaries, like bucket companies, do not get these credits.

What Are Discretionary Trusts?

Discretionary trusts let trustees decide who gets the income each year. This flexibility helps with asset protection, business planning, and tax management. Australia has over one million trusts, with about 840,000 being discretionary ones. In 2022-23, these trusts distributed $142.4 billion in income. The top 10% of households hold 90% of private trust wealth.

The government says these trusts often send income to family members or entities with low tax rates. This cuts the total tax a family pays. The new 30% minimum tax on discretionary trusts sets a floor to match the 30% rate workers pay on income from $45,001 to $135,000.

Who Does This Affect?

The rule targets common setups in family groups and small businesses. About 350,000 small businesses, or less than 15% of all active ones, use discretionary trusts. Around half of these trusts may see no change if they already distribute to people taxed at 30% or more. In any year, more than 90% of small businesses face no impact.

Families that split income among low-tax relatives will pay more. Trusts with corporate beneficiaries lose a key tax tool since companies get no credits. Business owners must weigh keeping the trust against the extra tax cost.

Exemptions and Excluded Income

Not all trusts face the new tax. Fixed trusts, widely held trusts, superannuation funds, special disability trusts, deceased estates, and charitable trusts stay out. Some income types also escape, such as:

• Primary production income
• Income for vulnerable minors
• Income hit by non-resident withholding tax
• Certain testamentary trust assets from before the announcement

These carve-outs keep the focus on standard discretionary trust income.

Transition Support for Businesses

The government offers help to switch structures. Rollover relief starts July 1, 2027, for three years. This covers income tax and capital gains tax when moving to companies or fixed trusts. The Australian Small Business and Family Enterprise Ombudsman will guide owners from January 1, 2027. ASIC will help with incorporation.

Paying salaries or wages to working relatives avoids the trust tax. This could shift how family businesses handle pay.

Part of Bigger Tax Changes

This fits a larger budget plan. Other steps include cost-base indexation for capital gains instead of the 50% discount from July 1, 2027, a 30% minimum on real capital gains, and limits on negative gearing for existing homes. The goal is to tax asset income more like wages and support housing.

The change expects to raise $4.5 billion over forward estimates by curbing income splitting.

Conclusion

The 30% minimum tax on discretionary trusts starts in 2028 but planning begins now. Families and small businesses should review distributions, especially to low-tax members or companies. With relief until 2030, there is time to adapt. This keeps trusts useful for protection and planning but raises their tax price.