If you have a family trust, proposed tax changes could affect how much flexibility you have from 1 July 2028.
The Federal Government has released draft legislation proposing a 30% minimum tax on discretionary trusts from 1 July 2028. The changes are not yet law, but they could have a significant impact on families and business owners who use trusts.
The good news is that existing trusts may have a choice.
Two options for existing trusts:
Option 1: Keep the flexibility
The trust continues operating as a discretionary trust, allowing the trustee to decide who receives income each year.
However, the trust would generally be subject to a minimum 30% tax rate. Individual beneficiaries may receive a credit for tax already paid, but companies receiving distributions would not receive the same benefit. This could make some existing trust structures considerably more expensive.
Option 2: Lock in the beneficiaries
Existing discretionary trusts can potentially elect to avoid the 30% minimum tax by permanently nominating beneficiaries and fixing their shares of income and capital.
For example, a family could nominate Mum to receive 50% and Dad 50%.
The trade-off is significant: the trust would largely lose its ability to change distributions in future years.
If the trust later distributes outside the nominated arrangement, the election could be cancelled. The trust could then face tax at the top individual rate for that year and be locked into the 30% minimum-tax regime going forward.
Why this matters
The flexibility of a family trust is often its main attraction.
A family might distribute more income to a lower-income spouse one year, or to an adult child in another year. Under the proposed fixed option, that flexibility would largely disappear.
It also means families need to think carefully about future generations. A child or grandchild who is not included in the original nomination generally cannot simply be added later.
New discretionary trusts established from 1 July 2028 would not have access to this fixed-distribution option.
There is also a potential exit route
The Government is proposing a three-year rollover period from 1 July 2027 to 30 June 2030 to make it easier for eligible discretionary trusts to transfer assets into another structure, such as a company or fixed trust, without triggering capital gains tax.
That does not necessarily mean restructuring will be cost-free, as other taxes, legal issues and state-based duties may still need to be considered.
What should you do?
There is no need to make a rushed decision. The legislation is still in draft form and may change.
But if you have a discretionary trust, it is worth asking:
- How important is the trust’s flexibility to your family?
- Have distributions historically been fixed or regularly changed?
- Does the trust distribute income to a company?
- Are there children or future generations you may want to benefit?
- Would another ownership structure make more sense in the future?
The key decision may ultimately be less about “how do I pay the least tax?” and more about “how much flexibility am I prepared to give up for greater tax certainty?”
This article is general information only and is based on proposed legislation. The rules may change before becoming law. Tax and legal outcomes depend on individual circumstances, so speak with your financial adviser and accountant before making any changes to your trust. As always, reach out to us if you have any questions.