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The original proposal was fairly significant.
From 1 July 2028, the Government wants to introduce a 30% minimum tax on income earned through discretionary trusts.
Which naturally led a lot of business owners — and accountants — to ask:
Not ideal.
Especially if it has been sitting there quite happily owning your business, investments or property for the past 20 years.
The good news is the Government has now changed its proposal.
The slightly less good news is they haven't actually scrapped it.
So, as is often the case with tax:
One of the big benefits of a discretionary trust is the word discretionary.
Each year, the trustee can decide which beneficiaries receive the trust's income.
Depending on the family's circumstances, that might be Mum, Dad, adult children or other eligible beneficiaries.
The Government's concern is that this flexibility can also be used to distribute income to family members on lower tax rates.
So the proposal is to introduce a 30% minimum tax on affected discretionary trust income from 1 July 2028.
In simple terms, the Government wants to make sure trust income has effectively had at least 30% tax paid on it.
There are exemptions proposed for certain trusts and types of income, so this isn't a case of every trust in Australia suddenly getting a 30% tax bill.
But plenty of family trusts could be affected.
What do we do with the trust? 🤷
One option under the original proposal was to restructure.
The Government proposed a three-year window where affected taxpayers could potentially move into another structure, such as a company or fixed trust, with income tax rollover relief.
Sounds easy enough.
Until you remember the trust might own a business.
Or property.
Or investments.
Or have bank loans.
Or contracts.
Or 20 years of history.
Suddenly moving everything into a shiny new structure isn't quite the tidy little exercise it sounded like.
And while the Federal Government can provide certain income tax concessions, that doesn't magically make every other legal, commercial and state tax issue disappear.
Hence the feedback from the business and tax community was essentially:
Could we perhaps not do that?
And, surprisingly enough, the Government listened.
The Government has now proposed another option.
Instead of restructuring the trust, an existing discretionary trust may be able to elect to make fixed distributions to nominated beneficiaries.
In exchange, it could stay outside the new 30% minimum tax regime.
Which means you could potentially:
👉 Keep the trust.
👉 Keep the assets where they are.
👉 Avoid the new minimum tax.
Lovely.
There is, however, one fairly important detail.
You have to give up much of the thing that made the discretionary trust useful in the first place.
The discretion.
Under the proposal, you would effectively nominate who is entitled to the trust's income and capital and lock in their percentages.
Instead of deciding each year:
"We'll distribute this much to Mum, this much to Dad and this much to the adult kids..."
you'd be saying:
"These are the beneficiaries. These are their percentages. This is how we're doing it - forever"
So you can't just change your mind every June depending on what suits the family.
So yes, the trust survives.
But it behaves a lot more like a fixed trust.
A discretionary-ish trust, if you will.
Not necessarily.
For some families, it might be a great solution.
If Mum and Dad were always going to receive the income anyway, locking in those percentages might not change much.
For another family, the flexibility might be incredibly valuable.
Maybe there are young children who will become adults.
Maybe different family members work in the business.
Maybe there are future succession plans.
Maybe the trust has historically changed its distributions significantly from year to year.
That's why this isn't really a question of:
"What's the best structure now?"
It's:
"What do we actually need this trust to do for the next 10 or 20 years?"
That's a much better question.
If the legislation ultimately passes in its current form, affected trusts will broadly have three choices.
Keep the discretionary trust and its flexibility, but deal with the new 30% minimum tax rules.
Elect into the new fixed distribution model and potentially stay outside the minimum tax rules.
Less flexibility. Potentially less tax.
Use the proposed transition period to move into a different structure altogether.
Three options.
And despite what you might read in a headline, there isn't one that's automatically "the best".
One very important point.
The Government released exposure draft legislation in September.
There is still a legislative process to go through, details can still change, and the proposed commencement date isn't until 1 July 2028.
So please don't read this article and immediately transfer the family business out of the trust you've had since 2004.
That would make for a slightly awkward phone call.
Right now?
Certainly don't restructure purely because of this announcement.
But we should start thinking ahead.
If you have a discretionary trust, we'll eventually need to understand;
👉 Who currently receives the distribution
👉 How much those distributions change each year;
👉 Whether you actually use the flexibility
👉 What assets are sitting inside the trust;
👉 What your succession plans look like; and
👉 What each option would actually cost you in tax.
Because here's the interesting bit.
Some families may discover they've been carefully preservin all this wonderful trust flexibility...
that they haven't actually used for 15 years.
If that's you, locking in distributions might not be much of a sacrifice.
For others, that flexibility could be worth a lot.
And that's why we'd rather model it properly than make a decision based on a headline.
The Government hasn't scrapped its proposed trust changes.
But it has softened them.
Affected family trusts may now have another way forward without having to completely restructure.
That's good news.
But the price of keeping your existing trust may be giving up some of its flexibility.
For now, the sensible approach is pretty boring:
Don't panic. Don't restructure. Don't do anything clever yet.
Let the legislation work its way through Parliament.
Once we know exactly what the final rules look like, we can work out which option makes the most sense for you.
And if nothing else, we can all enjoy the rare experience of a tax proposal becoming slightly less complicated after consultation.
Disclaimer: This article is here to give you general info only, not professional advice specific to your unique situation. While efforts are made to ensure accuracy, the content may change over time. We can’t take responsibility for any decisions based on the contents of this article, so be sure to chat with your accountant or advisor first!
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