What these trust tax changes could mean for your family business
If your business or investments sit in a family trust, the proposed trust tax changes probably have you asking what comes next, and what it could cost.
The Herald Sun’s 14 October article put numbers on those worries. Citing Wilson Asset Management estimates, it said advice and restructuring could cost families and small businesses between $8 billion and $13.3 billion nationally. It also reported that Treasury was talking with the states about possible stamp-duty waivers.
So the practical question for business owners is this: do you change your structure, or does keeping your trust still make sense?
We tackled that question in our recent Talking Trusts online session with live Q&A. PTP Business Advisory partners Joe Seccull and Tam Daniel, alongside accountant Jack Weimer, walked through the proposals, who could be affected and the options on the table.
The best place to start is understanding where you stand and giving yourself time to make a considered decision.
“We don’t need to rush into this and we shouldn’t,” Joe said.
Start by asking yourself three things:
- What kind of trust do you have?
- What income flows through it?
- What do you need it to do for your family over time?
What is the government trying to change?
In a nutshell, the proposals would reduce the tax benefits of spreading trust income to lower-income family members.
At the moment, trustees decide each year how to allocate income, and beneficiaries generally pay tax at their own rates.
“Every year the trustee gets to decide where that income goes and how much of it goes to the beneficiaries,” Jack explained.
That flexibility helps families adapt as life changes, for example when adult children are studying and earning less.
As Joe explained, traditional “bucket companies” are a particular government focus too. These are companies that receive and hold onto trust distributions, paying tax at the applicable company rate.
Put simply, the government wants to wind back the tax benefits of spreading trust income across the family and parking it in a bucket company, and it wants to introduce a minimum 30% tax on relevant trust income.
How would the proposed tax work?
Under the proposal, the trustee would pay a minimum 30% tax on relevant discretionary trust income from 1 July 2028.
Individual beneficiaries would still include their share of that income in their tax returns, but would receive a tax offset for the tax the trustee has already paid. As we explained during the session, any unused offset couldn’t be refunded or carried forward.
“The key word here being minimum. 30% is the starting point,” Tam said.
Depending on a beneficiary’s circumstances, more tax could apply. The offset is also applied before the Medicare levy, so a levy could still be payable on top.
Companies receiving distributions under the proposed minimum-tax regime wouldn’t get an offset for the tax the trustee has already paid. That means double taxation, and it changes how useful traditional bucket companies are.
Who could be caught—and who is excluded?
This matters because the proposal doesn’t treat every trust, or every type of trust income, in the same way.
Family and investment trusts
The proposal mainly targets discretionary trusts, including the family trusts commonly used to run businesses or hold investments.
Relevant business and investment income would be caught, unless an exclusion or alternative arrangement applied.
Fixed trusts and unit trusts
Fixed trusts are generally meant to sit outside the proposed rules, but check your arrangements before assuming a unit trust automatically qualifies.
A trust deed can still contain powers that allow discretion over beneficiaries’ entitlements. If yours does, the trust may not meet the proposed definition of a fixed trust.
Our advice: check the deed, not just the trust’s name.
Farming trusts
Primary production income is excluded under the proposal. That doesn’t necessarily exclude the whole farming trust, though.
In the session, we pointed out that farm leasing income, rent from a farmhouse and off-farm investments could still be caught.
So a trust that runs a farm and earns rental income could have different parts of its income treated differently. The practical reporting details still needed clarifying at the time of our session.
Deceased estates, testamentary trusts and special disability trusts
We also covered specific exclusions for these arrangements. Testamentary trusts, by the way, are trusts created through a will.
Read the conditions attached to these exclusions carefully. Trust deeds, wills and succession arrangements may need attention before you assume a structure is covered.
As Tam said, it comes back to two questions:
- What kind of trust do you have?
- What type of income flows through it?
What could the changes mean in dollars?
In the session, we ran the numbers on a hypothetical family trust earning $500,000 and distributing income to two parents, two adult children and a bucket company.
Under current rules, total tax was $118,630, an effective rate of 23.7%.
Under the proposed rules, with the same distributions, total tax rose to $199,200, or 39.8%. That’s an additional $80,570.
Splitting the income equally among the four individuals instead brought total tax to $160,000, or 32%.
To be clear, these were illustrative examples, not forecasts for every trust. We expect some arrangements could face a much smaller change, which is why it pays to look at your own circumstances.
Treasury’s small business explainer says around 350,000 active small businesses operated through discretionary trusts in 2022–23. It estimates around 40% of them, approximately 140,000, wouldn’t pay additional tax or need to restructure in any given year under the proposed changes.
You’ve got three options, and each needs some thought.
1. Keep the trust and make an Excluded Election Trust nomination
This proposed arrangement could keep a trust outside the minimum tax by fixing its nominated beneficiaries and their percentages of income and capital.
The trade-off: there’s very little room to change those nominations later.
As Jack explained, think about where you’ll be in five, ten or twenty years. An adult child studying today could later have a high income, and a fixed allocation looks a lot less attractive then.
Departing from the nominated arrangements could trigger significant penalty tax and pull the trust into the minimum-tax regime, so tread carefully.
2.Restructure or roll over
Moving assets or a business into another suitable structure may be the right option for you. The proposed expanded rollover window runs from 1 July 2027 to 30 June 2030.
But income tax relief doesn’t cover every cost. Think about GST, stamp duty, legal fees, valuations and cash flow, as well as possible changes to asset protection and flexibility.
Any restructure has to make sense for your business and your family as a whole.
3.Keep the existing arrangement
Staying put could preserve distribution flexibility, asset protection and succession options, and save you the cost of restructuring.
If your beneficiaries already pay relatively high tax rates, the additional tax may be modest.
Compare that additional tax with the cost and consequences of changing structures before deciding which way to go.
Common questions from our online session
The questions you submitted before and during our session kept coming back to a few key themes: when to act, whether trusts are still worthwhile and how the proposals apply to different family and business arrangements.
Should I act now or wait?
Start to gather information and review your structure now. There’s time to understand your options before decisions need to be made as the legislation is finalised.
Will trusts still be worthwhile?
Potentially. Even if the tax benefits change, we still see a role for trusts in asset protection and succession planning.
Is leasing farmland to another farmer excluded?
Our understanding is that leasing income would be caught. The exclusion covers primary production income from operating the farming business.
Can property deductions move into my name while the income stays in the trust?
No. As we explained during the session, deductions have to follow where the asset is held. Transferring the property would need a broader review of tax and other costs.
Could changing a trust deed create another tax problem?
Potentially. We flagged the risk of a “resettlement”, where changes may be treated as creating a new trust. Get legal advice before you amend a deed.
Is there an income threshold that makes a trust worthwhile?
There’s no single figure. Alongside the tax outcome, we look at your wider family group, business growth, asset protection and future plans.
Could a future government reverse the changes?
Possibly, but we wouldn’t build a tax-planning strategy around it.
How can I explore my own situation?
Get in touch and we’ll talk through your current structure, how the proposals could apply and the options worth considering.
General information only. Our session discussed draft legislation, which may change. Seek personalised advice before making decisions.
