If you operate a business or hold investments through a family trust, a proposed change to the tax rules may affect how the trust distributes its income in the future. The Government is proposing a minimum tax rate of 30% for certain discretionary trusts from 1 July 2028. Draft legislation was released in September, but the proposal is not yet law and may change before it is introduced into Parliament. For now, the important thing is to understand what is being proposed rather than make any immediate changes.

What Could Change?

A family trust generally allows the trustee to decide how the trust’s income is shared among eligible family members each year. Each beneficiary then pays tax on their share based on their own circumstances.

Under the proposal, some discretionary trusts may have to pay tax at a minimum rate of 30%, even where the income is distributed to a family member on a lower tax rate.

For example, a family trust may currently distribute income to an adult family member who has little or no other income. That family member would generally pay tax using the individual tax rates that apply to them. Under the proposed rules, the trust may first need to pay tax at the minimum rate of 30%, which could result in more tax being paid overall.

The ATO has published an overview of the proposed family trust tax changes and confirms that they are not yet law.

Will Every Family Trust Be Affected?

No. The proposed rules would only apply to certain discretionary trusts.

The Government has announced exclusions for several types of trusts and income. These include superannuation funds, deceased estates, charitable trusts and trusts established through a will for genuine estate-planning purposes. Some primary production income would also be excluded.

The Government estimates that fewer than 10% of Australia’s active small businesses would be affected in any particular year. Whether your trust may be affected will depend on its structure, income and how its distributions are made.

Is There an Alternative?

The September draft legislation includes a new option for some existing family trusts.

Instead of changing to a completely different structure, an eligible trust may be able to nominate in advance how its income will be shared among particular beneficiaries. If the relevant conditions are met, the trust may be excluded from the proposed minimum tax.

This could help some families avoid the costs and complications of restructuring. However, it would also reduce the trustee’s flexibility to change how income is distributed each year.

Further information about this proposed option and the draft legislation is available on the Treasury consultation page.

Do You Need to Do Anything Now?

There is no need to make immediate changes. The proposal would not commence until 1 July 2028 and still needs to progress through the consultation and parliamentary process.

Changing a trust deed or business structure can have wider consequences, including possible stamp duty, legal costs, financing issues and changes to asset protection. Any decision should therefore be based on the final legislation and the family’s broader circumstances, rather than the proposed tax rate alone.

Family trusts may continue to provide valuable benefits for operating a business, holding investments, protecting assets and planning for the future. MKG Partners will continue monitoring the proposed changes and can help affected clients understand their options once the final rules become clearer.