What the Reforms Propose for Trusts and Entities
- Starting 1 July 2028, discretionary trusts face a minimum tax rate of 30% with some exceptions. (budget.gov.au)
- Rollover relief allows trustees to restructure entities from 1 July 2027 until 30 June 2030 (three-year window) to prepare for the changes. (budget.gov.au)
- Amendments will affect individuals, trusts, and partnerships when calculating capital gains and eligibility under CGT discount rules. Loss carry-forward and negative gearing changes will also interact with your chosen structure. (budget.gov.au)
Possible Structure Alternatives & Their Implications
| Entity Type | Advantages | Disadvantages under New Rules |
|---|---|---|
| Fixed trusts or hybrid structures** | Might allow avoidance of discretionary distributions; can be more predictable for tax planning. | May lose flexibility; could incur higher compliance & legal cost to establish or change. |
| Companies | Flat tax rate, limited liability; more straightforward tax reporting. | May miss out on trust-specific concessions; profit distributions taxed as dividends. |
| Family trusts | Elections and concessions previously allowed, but reforms diminish their tax advantages under discretionary distributions. | Discretionary portion taxed at 30%; fewer beneficiaries may be conducive. |
| Self-managed Superannuation Funds (SMSFs) | Typically excluded from discretionary trust minimum tax; favourable CGT exclusions half discount still available through super rules. | Restricted by superannuation laws and contribution caps; liquidity and access issues. |
Planning Steps for Entity Setup Before the Reforms
-
Assess current distributions: Identify how much of your income flows through discretionary trusts and how it would be taxed under the minimum tax. |
-
Use the rollover period (from July 2027) to restructure: Shift assets or income streams into more favourable entities before the reforms take full effect. |
-
Compare marginal tax versus company tax rates: In some cases, using a company to receive income (then dividends) may be more efficient than experiencing the 30% trust tax. |
-
Legal and compliance review: Ensure changes respect legal requirements (trust deeds, beneficiary rights, state legislation) and maintain proper valuations. |
Example of Structuring Under New Regime
Suppose a family owns a property portfolio under a discretionary trust, distributing income among beneficiaries in high tax brackets (> 37%). Under new rules, the trust income will be subject to a 30% flat minimum tax—higher than some beneficiaries’ brackets. If restructured into a company, some profits could be retained or paid as franked dividends, potentially creating tax savings and better cash flows. |
Alternatively, fixed trusts might be arranged to limit discretionary distribution, but they must comply strictly with fixed entitlements. |
Key Takeaways for Entity Setup
- Act early: Use the window from 12 May 2026 until 1 July 2027 to plan, restructure, or dispose of assets to avoid unwanted tax outcomes. |
- Seek professional advice: Trusts and companies involve complex laws—incorrect restructuring can incur unexpected tax liabilities. |
- Keep an eye on enacted legislation: Reforms announced in the Budget may still require full passage through Parliament before being law. |
By understanding entity impacts now, you can structure your affairs to retain flexibility, limit tax impact, and align with long-term goals under the new environment.