What’s Changing for Discretionary Trusts
Starting 1 July 2028, trusts in Australia will face a 30% minimum tax rate on distributions from discretionary trusts—with very few exceptions. Meanwhile, Schedule 2 of the Delivering an Efficient and Trusted Tax System bill introduces stricter Tax File Number (TFN) reporting requirements for beneficiaries of closely held trusts. (budget.gov.au)
Trusts are capture-wide used for family wealth planning, asset protection, and business income splitting. Under the new regime:
- The minimum 30% tax on discretionary trust distributions means that high-earning beneficiaries can no longer rely on flowing income through trusts to achieve lower marginal tax rates. (budget.gov.au)
- TFN Streamlining for closely held trusts (Schedule 2) requires trustees to report beneficiary TFNs upon lodging trust tax returns. Beneficiaries remain quoted unless notified by the Commissioner that their TFN is incorrect. (aph.gov.au)
Impacts to Trust Owners & Advisors
| Issue | Before Reform | After Reform |
|---|---|---|
| Distributions to family members with lower incomes | Could be distributed to reduce overall family tax burden | Taxed at 30% unless beneficiary is a corporate or meets specific exception criteria (budget.gov.au) |
| Beneficiaries who haven’t quoted a TFN | Could avoid withholding in some cases | Treated as not having quoted with withholding obligations potentially applying (aph.gov.au) |
| Trusts with poor trust deeds/structures | No regulatory minimum tax threshold | Higher risk of unexpected tax liabilities or compliance costs |
What You Can Do Now: Checklist for Trust Restructuring
- Review distributions: consider aligning income distributions to beneficiaries who qualify for exceptions, like corporate beneficiaries, to avoid trigger of 30% minimum tax. |
- Update trust deeds and governance so that they reflect potential shifts in distribution strategy or structure. |
- Ensure TFNs are collected and maintained for all beneficiaries, especially those presently entitled. Not quoting can lead to adverse withholding. |
- Prepare for transition relief: there are rollover provisions for those restructuring trusts from 1 July 2027 to 30 June 2030. |
Example Scenario
Imagine a discretionary family trust distributing income among three adult beneficiaries: one with a salary, one student, one retired. Under new rules the trustee may have to pay 30% tax on the shares given to the lower-earning individuals unless redistributed to a corporate beneficiary, or unless exceptions apply. This changes traditional income splitting strategies.
Strategic Takeaways for Entity Setup
- When considering structure, compare company structure vs trust vs hybrid: company income taxed at corporate rate (30–25%), distributions via franked dividends; trusts taxed at 30% minimum unless beneficiary meets exceptions. |
- Use professional advice to model your distributions, considering cash flows, individual tax rates and family income. |
- Anticipate increased compliance: with newer reporting, record-keeping and possibly legal costs likely to rise.
Trust owners and advisors must act deliberately: these reforms aren’t just tweaks—they deserve a full strategy reset.