Treasury has opened a formal consultation on its proposed overhaul of how discretionary trust income is taxed, releasing a detailed discussion paper into the changes.
Treasury has released a consultation paper fleshing out the Albanese government’s 2026–27 budget pledge to impose a 30 per cent minimum tax on the taxable income of discretionary trusts from 1 July 2028, together with a three‑year window of rollover relief to help those that decide to restructure.
The paper said that the measure was intended to “make the tax system fairer by better aligning the tax rate on trust income with tax rates paid by workers”.
While the new floor would apply to discretionary trusts, other structures – including fixed and widely held trusts, complying superannuation funds, special disability trusts, deceased estates, and charitable trusts – would remain outside its scope.
Treasury also confirmed that income from discretionary testamentary trusts would also be excluded, provided that the trust had been established for genuine testamentary purposes such as passing assets through a will.
Beyond that carve‑out, the design of trust taxation is largely unchanged.
Trustees of discretionary trusts will still decide how income is shared among beneficiaries each year; beneficiaries would continue to declare those distributions in their personal returns; and trustees would remain assessable on the trust’s taxable net income in proportion to their entitlement.
The paper said that income already taxed in the trustee’s hands would “generally not be affected” by the new regime and reiterated that where no beneficiary is made entitled to trust income, the existing income would be taxed to the trustee at the top marginal rate plus the Medicare levy.
Treasury said that, on its estimates, fewer than 15 per cent of active small businesses operated through discretionary trusts, and more than 90 per cent of small businesses in any given year would not be caught by the minimum tax.
3‑year restructuring window – but limits on relief
To support businesses and families that may wish to move out of discretionary trusts, Treasury has proposed expanded rollover relief covering restructures into companies or fixed trusts.
Under the plan, assets can be transferred without triggering immediate capital gains or other income‑tax liabilities, with that relief available for three years from 1 July 2027.
However, the discussion paper said that this relief is confined to tax consequences.
It does not extend to professional fees or state charges, meaning groups that restructure would still be responsible for accounting and legal costs and any stamp duty payable on transfers.
Treasury also said that businesses shifting into companies would gain access to the corporate tax rate and the ability to retain profits within the entity – but would also lose access to the capital gains tax discount or indexation on assets held in the company.
Treasury said it is seeking submissions on several technical questions including the detailed exclusions and core rules for discretionary trusts, the treatment of distributions to tax‑exempt entities such as charities, the handling of excess franking credits, and the design of practical collection mechanisms for the new minimum tax.
Submissions close on 31 July.
COSBOA warns hundreds of thousands could feel the impact
Yet the Council of Small Business Organisations Australia (COSBOA) said that the paper confirmed that the government had not adequately addressed the worries of family‑run enterprises that rely on discretionary trusts.
COSBOA estimates around 350,000 small businesses use discretionary trust structures and said that budget papers suggest roughly 210,000 small family businesses could face higher tax from 2028.
“The consultation paper shows the Government hasn’t listened to the concerns of hundreds of thousands of genuine small businesses expected to be negatively impacted by the introduction of a minimum 30 per cent tax rate on taxable income of trusts,” COSBOA CEO Syke Cappuccio said.
“Many small businesses will face an impossible choice between a higher tax burden or a costly restructure. The consultation paper confirms that rollover relief will not cover accounting and legal costs necessary to restructure or state‑based stamp duty.”
COSBOA is also worried about how the minimum tax interacts with the Medicare levy and personal tax scales.
“The paper also notes that tax credits to trust beneficiaries won’t cover the Medicare levy. This means family members paid through a trust will effectively pay a minimum tax rate of 32 per cent,” she said.
She contrasted that effective burden with the rates faced by employees, saying that many small-business owners could end up paying more tax on modest incomes than high‑earning employees.
“To have an effective tax rate of 32 per cent as an employee you need to be making above $200,000 a year. This is well above what many small-business owners pay themselves,” Cappuccio said.
“This sends a clear signal about how Australia values those prepared to take the financial and legal risks associated with starting, investing in and growing a small business.”
COSBOA welcomed confirmation that primary production income would be excluded from the new minimum tax, reflecting earlier pressure from farm groups concerned about succession planning and intergenerational transfers.
Yet she said that many other family‑run businesses were perplexed that similar treatment had not been extended more broadly.
[Related: Trust tax shake-up alarms small-business advocates]
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