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Proposed changes to discretionary trust taxation could affect Australian business owners, investors and family trusts from 2028. Learn what has been proposed, who may be impacted and the key considerations before taking action.
Family trusts, also known as discretionary trusts, have been a common feature of financial and business planning in Australia for decades.
They are often used to hold investments, operate businesses, manage succession planning and provide asset protection for families. However, recently proposed Federal Government changes could significantly alter how discretionary trusts are taxed in the future.
While the proposals are still undergoing consultation and have not yet become law, many business owners and investors are understandably asking what the changes could mean for them.
Why Are Family Trusts Receiving Attention?
The Federal Government has proposed introducing a minimum 30% tax on discretionary trust income from 1 July 2028. Under the proposal, trustees would pay tax at the trust level before income is distributed to beneficiaries. Treasury estimates there are approximately 840,000 discretionary trusts operating across Australia, including many used by small businesses and family investment groups.
Historically, discretionary trusts have allowed trustees flexibility in distributing income amongst eligible beneficiaries. This flexibility has been one of the key attractions of the structure, particularly where family members have different tax positions.
The proposed changes are intended to reduce some of these tax planning outcomes while maintaining the broader legal and succession planning benefits trusts can provide.
What Has Been Proposed?
While details may change before legislation is finalised, the current proposal would require trustees to pay a minimum 30% tax on trust income before distributions are made to beneficiaries. Beneficiaries would still declare trust income in their individual tax returns, but the tax collection process would operate differently to the current system.
Importantly, many technical details remain under consultation, including how certain income types, capital gains and tax credits may be treated.
As a result, it is far too early to make significant restructuring decisions solely based on the current proposals.
Who Could Be Affected?
The proposals may be relevant for:
However, the impact will vary considerably depending on each family's circumstances, the nature of trust income, and how distributions are currently made.
For many clients, the trust's advantages extend well beyond taxation alone.
Tax Isn't the Only Reason Trusts Exist
One common misconception is that trusts are used purely for tax purposes.
In reality, many families establish trusts to achieve much broader objectives, including:
Even if taxation outcomes change, these benefits may still make a trust structure appropriate in many situations.
Should You Be Considering Alternatives?
A number of commentators have suggested some business owners may eventually consider alternative structures, including companies or alternative investment entities.
The Government has also proposed temporary restructure relief measures designed to assist certain eligible entities that choose to move away from discretionary trust structures.
However, restructuring can involve significant legal, accounting and commercial considerations. What may be appropriate for one family may be entirely unsuitable for another.
Before making decisions, it is important to understand:
Why Patience May Be Sensible
At this stage, the proposed rules remain subject to consultation and legislative processes.
History has shown that tax reforms can change significantly between consultation papers and final legislation. In some cases, proposed reforms have been amended substantially or not proceeded with at all.
For this reason, many advisers are encouraging clients to stay informed while avoiding unnecessary action until there is greater certainty around the final rules.
What Should You Do Now?
If you currently have a family trust, consider the following:
✓ Review why the trust was established in the first place.
✓ Ensure trust deeds and documentation remain current.
✓ Understand how income is currently being distributed.
✓ Discuss potential implications with your financial adviser and accountant.
✓ Avoid making major structural changes until legislation becomes clearer.
For many families, there may be no immediate action required. The most valuable step today may simply be understanding your current position and monitoring future developments.
Key Takeaways
While the proposed trust changes have attracted significant attention, it is important to remember that the rules are not yet final.
Family trusts continue to play an important role in wealth management, business ownership, asset protection and succession planning. Although taxation outcomes may evolve, trusts are likely to remain a valuable planning tool for many Australians.
As more detail becomes available, business owners and investors should seek professional advice to ensure any decisions are based on the final legislation and their individual circumstances, rather than speculation.
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This edition’s Staff Spotlight gives us the opportunity to learn a little more about Tristan Borg, our Associate Financial Adviser based in our Beaumaris office.
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