Sweeping new trust tax changes are coming. Will they affect you?

It was only a few weeks ago that Treasurer Jim Chalmers handed down his “intergenerational inequality” budget. As part of his tax package, he announced changes to capital gains tax, negative gearing, and discretionary trusts.

And, while much of the attention has focused on the capital gains tax changes (including a social media AI deepfake campaign against Prime Minister Anthony Albanese), the trust tax changes have largely gone unnoticed.

What’s changing?

The government is introducing a 30 per cent minimum tax on discretionary trusts. Also known as family trusts, these represent 80 per cent of the 1 million trusts registered in Australia.

Will these changes affect me?

Unless you are a trustee or a beneficiary of a trust, these changes will not impact you. If you don’t know what those words mean, that’s a good indication you’re in the clear.

In fact, Treasury estimates that more than 95 per cent of Australians will not be affected by these changes. Because 90 per cent of trust wealth in Australia belongs to the top 10 per cent of households, these changes will have a minimal impact on the middle class.

For those who do have a trust, Treasury estimates that only half will be impacted in any given year.

Exclusions also exist for other types of trusts, including fixed, widely held, special disability, deceased estate, and charitable trusts. There are also exclusions for some special types of trust income, including primary production income relevant for many farmers, vulnerable minors, and income from assets of testamentary trusts.

Assuming these changes are passed in parliament, the trustee (the person who controls the trust) will pay the 30 per cent minimum tax. Individual beneficiaries (often children and spouses who receive trust distributions) will now be required to pay tax on their trust income, minus a non-refundable tax credit for the 30 per cent already paid by the trust. This ensures they are not double taxed.

The details on how these changes will affect you likely depend on why you set up a trust in the first place:

For families

These changes greatly reduce any benefits from “income splitting”, often the primary reason many families set up trusts in the first place.

Income splitting allows a high-income earner on a high marginal tax rate of up to 47 per cent to distribute their income to lower-income family members on lower tax rates, sometimes as low as zero per cent.

The practice is often described as a “loophole” and the government argues the current rules give wealthier households an unfair tax advantage. Treasury estimates that families with discretionary trusts faced average tax rates 4 percentage points lower than families of similar incomes without trusts. This difference represents at least $12,000 for a top 10 per cent household (with earnings of more than $310,000).

The real winners from these changes are likely going to be the accountants.

For families who will be worse off under these changes, it is important to remember that discretionary trusts were not originally designed as income-splitting vehicles.

Many households have nonetheless enjoyed favourable treatment under the existing rules for quite a while now.

For businesses

Treasury estimates that only 15 per cent of small businesses operate as a discretionary trust. However, 60 per cent of these 350,000 small businesses may need to restructure if they want to avoid paying more tax.

According to Treasury, restructuring your business into a company or fixed trust is the most common solution. Implicit in this law change, the government is suggesting that discretionary trusts may not be the appropriate structure for managing a business.

For those who use trusts for asset protection

Some professions may use trusts to protect their assets. For example, doctors may use trusts to protect their assets in the case of a malpractice lawsuit.

Remembering that professional indemnity insurance is the gold standard protection for malpractice suits – not trusts – these changes don’t seem to preclude doctors from continuing to use trusts for this purpose.

However, it just means they won’t receive as generous income splitting benefits as before.

For those using bucket companies

“Bucket company” arrangements – which involve trusts distributing income to a corporate beneficiary (i.e. a company) – are often used by wealthier families to defer and minimise tax.

Under the new rules, these arrangements become significantly less attractive because corporate beneficiaries will not receive the tax credits that individual beneficiaries get for the 30 per cent trustee-paid minimum tax.

While the government is not outlawing these arrangements, it is using multiple layers of taxation to make them substantially less desirable for tax minimisation purposes.

Treasury estimates that at least 83 per cent of current “bucket company” arrangements primarily exist for tax minimisation rather than actual business activity.

The trust changes will not come into effect until July 1, 2028 so there is still plenty of time to make changes accordingly.

Moreover, the government is offering restructuring rollover relief for three years from 1 July 2027, which will ensure no income or capital gains tax consequences. The Australian Small Business and Family Enterprise Ombudsman will “be available to assist small businesses” to understand their options.

What can I do?

It is important to remember that while these changes have been announced, the government has not yet released draft legislation. It may sound boring, but these legislative details will likely be critical in determining how these changes should guide future financial decisions (including the next best “optimal” tax minimisation strategy).

If your discretionary trust is a legitimately operating business, you can hire your beneficiaries and pay them wages as this will be exempt from the new tax.

If your trust exists mainly for income splitting purposes, these changes likely won’t preclude you from continuing to do this. It just reduces the likely maximum benefit of this tax minimisation strategy from 47 per cent to 17 per cent, depending on the exact legislative details.

Another option is restructuring into a fixed trust, although this comes at the cost of losing much of the flexibility to vary distributions between beneficiaries each year.

Overall, this change will primarily affect the top 5 to 10 per cent of Australian households. As I previously quipped, the real winners from these changes are likely going to be the accountants.

Once the details are available, they are likely to earn substantial fees helping clients restructure around the new tax rules.

Max Yong is a teaching fellow in personal finance at Harvard University. He previously taught personal finance at Melbourne University.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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