Here’s how trusts work. And here’s why the tax man wants a bigger slice
Two families, identical incomes — but one pays half the tax. The government wants to close the gap. Here's what changes.
Trusts are a piece of legal engineering most Australians never need to think about — until they do. They sit quietly in the background of countless small businesses and family balance sheets, perfectly legal, often sensible, and carefully constructed to ensure that income ends up in the hands of whoever is paying the lowest rate of tax at the end of the financial year. That flexibility is exactly why the government has decided to tax it.
The mechanism rewards holding, not earning — and the tax system has never corrected for it
To understand what is at stake, you need to understand what a discretionary trust actually is. A trust is not a company and not a person. It is a legal relationship in which one party, the trustee, holds and manages assets on behalf of another, the beneficiaries. The trustee has legal control over the assets. The beneficiaries have the economic interest in them. What makes a discretionary trust different from other forms of trust is that the trustee has genuine discretion each year to decide how the income produced by those assets is divided among the beneficiaries. There is no fixed share. The trustee, often the family patriarch or a family company, looks at the income generated by the trust for the year, looks at the marginal tax rates of each beneficiary, and allocates the income accordingly.
The mechanic here is elegant, and it is the point. Suppose a family trust earns $300,000 from a business or investment portfolio. The trust has four potential beneficiaries: two working parents already in high tax brackets and two adult children, perhaps students or part-time workers, with little other income. The trustee can distribute $45,000 to each child, keeping them inside the 19 per cent bracket, and take what is left over in the business entity. The tax bill across the family unit is substantially lower than if the same $300,000 had landed on a single individual's tax return. No income has been hidden and no law broken. The structure has simply used the architecture of progressive taxation — which taxes individuals, not households — to arbitrage across multiple people's tax-free thresholds.
A wage earner on $300,000 cannot split that salary with their spouse or children before paying tax. A trust beneficiary can.
This is the core of what the government means by "tax planning that isn't available to most Australians." A wage earner on $300,000 cannot split that salary with their spouse or children before paying tax. A trust beneficiary can.
Trusts predate income tax — but their tax advantages do not
Trusts are not new and they are not rare. They were developed in English common law centuries before the income tax existed, originally to hold land for beneficiaries who could not own it directly. In Australia they evolved into all-purpose vehicles for holding farms, family businesses, investment properties, and share portfolios. Hundreds of thousands of them are in operation today, and many of them have entirely sensible non-tax reasons for existing: asset protection from creditors, orderly succession planning, managing assets for children or vulnerable family members. The government has acknowledged this directly, carving out testamentary trusts, special disability trusts, primary production income, and several other categories from its proposed minimum tax.
The government's proposal is not to abolish the trust or unwind its asset-holding function. It is to install a floor on the tax rate paid on the income it distributes. From 1 July 2028, if a trustee makes distributions that would otherwise be taxed at less than 30 per cent — by flowing income to low-income beneficiaries — the trust itself will be liable for a minimum 30 per cent rate on that income. The benefit of splitting income to beneficiaries in lower brackets is, in effect, capped.
Fairness is a real argument here, but so is disruption
The question of whether this is the right policy involves a genuine tension. The government's fairness case is not manufactured. A system in which access to a good accountant and a trust structure can legally halve your effective tax rate is a system where two families on identical economic incomes pay materially different tax, depending on how sophisticated their financial arrangements are. That asymmetry has real distributional consequences.
But the behavioural response is also real. When the tax advantage of a structure narrows, people restructure. Some will move assets into companies. Some will reconsider whether the trust is worth maintaining. Some will absorb higher tax costs. The government is offering three years of rollover relief for small businesses that want to restructure out of their trust entirely, which is a recognition that the transition is not trivial. Disrupting the legal scaffolding around a family business carries costs that go well beyond tax: legal fees, stamp duty, changes to asset protection arrangements, and relationships with lenders who have structured loans against existing entities.
Treasury is consulting on plumbing, not principle — the direction is set
The consultation paper released by Treasury is a technical document seeking feedback on the plumbing of implementation: how exemptions will work, how franking credits will be treated, how charities that receive trust distributions fit into the picture. The fact that Treasury is consulting on implementation rather than principle is a signal about where this is headed. The policy direction has been decided. The argument now is about the detail.
What is clear is that the era of the discretionary trust as a simple income-splitting mechanism is ending. Whether the change leaves affected families and businesses better or worse placed depends almost entirely on how cleanly the final legislation translates principle into practice, and how much disruption the transition turns out to impose on structures that have been built up, in many cases, over decades.
Frequently Asked Questions
What is the proposed minimum tax on family trusts in Australia?
From 1 July 2028, discretionary trust distributions that would otherwise be taxed at less than 30 per cent will attract a minimum 30 per cent tax, payable by the trust itself. The measure is designed to end the practice of routing trust income to low-income family members to reduce the overall tax bill.
Why can't wage earners split their income the way trusts do?
Australia's income tax system taxes individuals, not households. A salary earner cannot attribute part of their wage to a spouse or child before it is assessed. A trustee of a discretionary trust can allocate income freely among beneficiaries each year, allowing the family to use multiple low-rate tax thresholds against what is effectively a single pool of income.
Are all family trusts affected by the proposed changes?
No. The government has announced carve-outs for testamentary trusts, special disability trusts, and primary production income, among other categories. The reform targets trusts using income splitting as a tax-minimisation strategy, not the asset-holding or succession-planning functions of trusts more broadly.
What happens to businesses currently structured through a trust?
The government is offering three years of rollover relief for small businesses that want to restructure out of a trust before the reform takes effect. Restructuring still carries real costs — legal fees, potential stamp duty, and disruption to asset protection and lending arrangements — so the relief does not make the transition cost-free.
Could people just move assets from a trust into a company to avoid the new tax?
Potentially. The company tax rate in Australia sits at 25 to 30 per cent depending on entity size, which is at or below the proposed trust minimum. The reform may therefore accelerate a shift toward company structures without capturing all of the revenue it targets — a design risk the consultation is likely to grapple with.