Discretionary Trusts : Another Budget Casualty

The Federal Budget has proposed a significant change to the taxation of discretionary trusts, introducing a minimum tax rate of 30% on trust income from 1 July 2028. While the legislation has not yet been passed, the proposal could have a substantial impact on many family groups, property investors and small business owners who use discretionary trusts as part of their tax planning strategy. Currently, trust income can be distributed to beneficiaries and taxed at their individual marginal tax rates, often resulting in lower overall family tax outcomes.

The Government’s objective is to reduce income splitting opportunities available through discretionary trusts. Under the proposed rules, trust income would effectively be taxed at a minimum rate of 30%, regardless of which beneficiaries receive the distribution. While beneficiaries would generally receive tax credits for tax already paid by the trust, the ability to distribute income to family members on lower tax rates would be significantly reduced.

Example

Consider a family trust that earns $180,000 of taxable income during the year. Under the current rules, the trustees may distribute $60,000 each to three adult beneficiaries. Assuming each beneficiary has little or no other taxable income, each may pay approximately $11,000 in tax, resulting in a combined family tax bill of around $33,000.

Under the proposed rules, the trust itself would first pay a minimum tax of $54,000 (30% of $180,000). Although the beneficiaries would receive credits for the tax paid by the trust, the overall tax outcome would be based on the 30% minimum rates rather than the beneficiaries lower marginal tax rates. In this example, the family’s total tax cost could increase by approximately $21,000, reducing much of the tax benefit previously achieved through the trust structure.

While trusts may continue to provide important asset protection, succession planning and wealth management benefits, their tax effectiveness could be significantly reduced if these changes proceed. As your accountants, we recommend undertaking a proactive review well before the proposed commencement date to ensure your structure remains aligned with your long term objectives.

Author

Kim Jay