Family trusts have long been used by Australian families and business owners to manage assets, distribute income and plan for the future. They offer flexibility when managing family investments, business interests and long-term financial arrangements. However, proposed changes to Australia’s trust taxation rules mean that many trustees may need to reconsider their existing strategies.
The proposed 30% minimum tax on discretionary trusts is an important development that could change how some family trusts manage and distribute income. With the proposed changes expected to commence from 1 July 2028, trustees have time to review their arrangements and understand the potential impact.
Why Are Australia’s Family Trust Tax Rules Changing?
The Australian Government has proposed changes to address the tax advantages associated with discretionary trust income distributions. Under the proposed framework, discretionary trusts would generally be subject to a minimum tax rate of 30% on their taxable income.
The trustee would be responsible for paying the minimum tax, while eligible individual beneficiaries would generally receive non-refundable tax offsets for the tax paid by the trustee.
The proposal is intended to create greater consistency in how trust income is taxed. However, its impact will depend on the type of trust, its beneficiaries, income sources and existing financial arrangements.
Not all trusts are expected to be covered. Certain structures, including fixed trusts, charitable trusts and complying superannuation funds, are among the proposed exclusions.
Understanding these changes early can help trustees identify whether their current arrangements may need attention.
1. Review Your Existing Family Trust Structure
Many family trusts have been operating for years without significant changes to their original arrangements. While the structure may have suited the family’s financial circumstances when established, it is worth checking whether it remains appropriate.
Start by reviewing the trust deed, beneficiary list, trustee arrangements and any existing family trust elections.
Pay attention to these areas:
- Trust deed: Check whether the deed allows the trustee to distribute income according to the family’s current requirements.
- Beneficiary details: Review who is eligible to receive trust distributions.
- Trustee responsibilities: Make sure the trustee understands their legal and administrative obligations.
- Business and investment assets: Identify the assets held within the trust and how they generate income.
- Existing elections: Check whether family trust or interposed entity elections affect the current arrangement.
A detailed review can help identify potential issues before the proposed tax changes take effect.
2. Reconsider Your Income Distribution Strategy
Income distribution is one of the most important aspects of family trust management.
Traditionally, discretionary trusts have allowed trustees to distribute income among eligible beneficiaries according to the trust deed and applicable tax rules. Families have often considered each beneficiary’s income and marginal tax rate when making these decisions.
However, the proposed 30% minimum tax could change the financial outcomes of certain distribution arrangements.
For example, a family trust that distributes investment income among several individual beneficiaries may need to reconsider whether its existing approach will remain suitable.
Trustees should review their distribution history, expected income and the financial circumstances of beneficiaries. Rather than relying on arrangements used in previous years, families should assess how different distribution scenarios could affect their overall tax position.
All distribution decisions must comply with the trust deed and applicable tax legislation.
3. Assess Whether Your Trust Needs Restructuring
For some families, retaining their current discretionary trust may continue to make financial and commercial sense. Others may want to explore alternative structures.
The proposed reforms include a three-year rollover relief period beginning on 1 July 2027. This is intended to help eligible businesses and other taxpayers restructure out of discretionary trusts into arrangements such as companies or fixed trusts without triggering certain income tax or capital gains tax consequences.
However, restructuring is not automatically the best option.
Before making a decision, consider:
- Potential tax implications of transferring assets.
- State and territory stamp duty requirements.
- Ongoing accounting and administration expenses.
- Asset protection and succession planning objectives.
- The effect on existing business operations and ownership arrangements.
A change in structure can have long-term consequences, so it is important to compare the financial and legal implications before proceeding.
4. Understand the Proposed Excluded Election Trust Option
Another important part of the proposed reforms is an election option for certain discretionary trusts.
Under the proposed framework, eligible trusts may be able to elect into an excluded election trust arrangement instead of paying the new minimum tax.
However, this option comes with conditions. It involves nominating beneficiaries and their respective proportions of trust income and capital. The nominated distribution arrangements would generally need to be maintained.
This could reduce flexibility for families who currently change distributions depending on their financial circumstances each year.
For example, a family with changing income requirements, new beneficiaries or evolving business interests may find fixed distribution proportions difficult to maintain.
Trustees should carefully compare this option with restructuring or remaining under the proposed minimum tax rules before making any election.
5. Keep Trust Accounting and Tax Records Up to Date
Good record-keeping will remain important regardless of whether the proposed reforms affect your trust.
Trustees should maintain accurate records of income received, expenses, investment transactions, beneficiary distributions and relevant trustee decisions.
Useful documents to organise include:
- Previous trust tax returns and financial statements.
- Bank statements and investment records.
- Property purchase and sale documents.
- Beneficiary distribution resolutions.
- Trust deed and amendments.
- Records of business income and deductible expenses.
Keeping these documents organised makes annual reporting easier and helps identify potential compliance issues.
It also gives accountants a clearer picture when assessing how the proposed changes could affect the trust.
6. Seek Professional Advice Before Making Changes
Trust taxation involves several interconnected rules, and the right approach depends on the trust’s purpose, assets, beneficiaries and income sources.
A decision that works for one family may not be appropriate for another. For example, a trust holding investment properties may have different considerations from one operating an established family business.
Professional advice can help trustees understand their existing obligations, assess the proposed reforms and compare available options.
An experienced accountant can also assist with preparing a trust tax return, reviewing distribution arrangements and identifying potential tax planning opportunities under the applicable rules.
If your family trust holds business or investment assets, consulting a tax agent perth can also help you understand the implications of the proposed changes and plan the next steps.
Final Thoughts
Australia’s proposed trust tax reforms make it important for family trust owners to review their existing arrangements well before 2028. From checking the trust deed and reviewing income distributions to considering restructuring options, early preparation can help families avoid rushed decisions.
Not every family trust will require major changes. The right approach will depend on its financial objectives, ownership arrangements and the final legislation.
By staying informed, maintaining accurate records and seeking professional advice, trustees can make better decisions and prepare their family trusts for Australia’s changing tax environment.
