Trust tax tightens: the restructuring question Treasury can't quite settle

Headline: Trust tax tightens: the restructuring question Treasury can't quite settle
Source: Treasury — https://ministers.treasury.gov.au/ministers/jim-chalmers-2022/media-releases/exposure-draft-legislation-minimum-tax-discretionary

Treasury released draft legislation this week to impose a minimum 30 per cent tax on income distributed through discretionary trusts, part of the government's effort to close one of the more durable gaps between what high earners with the right structure pay and what wage earners in the same bracket pay. The reform itself has a coherent logic. Its execution raises a set of problems that the draft legislation tries, with only partial success, to resolve.

The underlying logic is simple enough. A family trust can distribute income to low-income beneficiaries — adult children in university, a spouse with little other income — shrinking the taxable slice attributed to whoever actually controls the money. The result is an effective rate well below what a wage earner on the same combined household income would pay. The government's earlier consultation paper set out the mechanism in detail. The draft legislation is the government's attempt to price that advantage out of existence.

The minimum rate of 30 per cent — matching the company rate — would apply to any trust income not taxed at a higher rate in a beneficiary's hands. So if you distribute to a student daughter earning $20,000, the trust pays the gap between what she would have paid and the 30 per cent floor. The policy raises money and, on its face, addresses a real inequity. Both things can be true.

The carve-outs reveal how hard it is to target one behaviour inside a general-purpose structure

What makes the draft interesting is the sheer number of exceptions and escape valves the government has had to bolt on to prevent the policy from catching legitimate structures in the blast radius. Widely held trusts, managed investment trusts, bare trusts, employee share trusts, special disability trusts, charitable trusts, superannuation funds, primary production income, deceased estates, testamentary trusts: all carved out. Distributions to registered charities and deductible gift recipients: exempt. Sporting clubs: exempt up to a cap not yet determined.

This complexity is not evidence of bad faith. It is the inevitable byproduct of trying to target a specific behaviour — discretionary income splitting for tax advantage — in a legal structure that also houses a vast array of legitimate commercial, estate planning, and family purposes. Trusts are not inherently tax dodges. They are a general-purpose vehicle, and the government is trying to surgically remove one use case without destroying the others. The carve-outs exist because the alternative would be worse.

The small business escape routes work better for predictable income than for real businesses

But the surgery is messy. The most contested ground in the draft is what happens to small businesses currently operating through discretionary trusts for perfectly ordinary reasons. Treasury's own figure is that fewer than 10 per cent of Australia's 2.7 million active small businesses will be affected in any given year. That is still a large number of businesses in absolute terms, and "in any given year" is doing real work in that sentence — a business near the threshold could bounce in and out of compliance year to year, which is its own kind of planning burden.

The government is offering two escape routes for affected trusts. The first is a three-year rollover relief window from July 2027, allowing restructuring without immediate capital gains tax. The second is a new election mechanism: trusts that nominate fixed distributions to specific beneficiaries upfront can avoid the minimum tax without a full restructure. This is genuinely useful for trusts where income streams are predictable. It is less useful for small business operators whose income fluctuates with the economy, and who chose a discretionary trust precisely because of that flexibility. Locking in fixed distributions a year in advance is not always commercially realistic.

The restructuring relief is also only as clean as state governments allow it to be. Treasury has flagged the fixed-distribution election "is not expected to result in state and territory stamp duties." That expectation is not a guarantee. Stamp duty on business asset transfers is a state matter, and the history of federal tax reforms creating unintended state revenue events is long enough to treat any such assurance with mild caution.

Compliance costs arrive before any productivity dividend does

There is also the broader productivity question sitting behind all of this. Australia genuinely needs more productive investment and more capital allocated to growth rather than to tax minimisation. On that measure, discouraging income-splitting through trusts and redirecting that energy into actual business activity has a reasonable argument. But the mechanism chosen here, with its patchwork of exemptions, elections, rollover windows, and carve-outs, generates compliance costs before it generates any productivity dividend. As we have noted before in the context of other business tax measures, tax changes that require businesses to engage professional advisers to understand their position are a form of tax on complexity that falls hardest on the smallest operators.

The goal of a fairer tax treatment between wage earners and trust beneficiaries is defensible and arguably overdue. The mechanism to get there has enough unresolved edges that anyone running a small business through a discretionary trust should treat the consultation period as the most important business meeting of the next twelve months. Treasury needs to hear from them, because the exposure draft is not yet the finished product, and the distance between those two things could determine whether this reform delivers genuine fairness or just a more elaborate fee schedule for accountants.

Sources

Treasury Ministers — Exposure draft legislation: Minimum tax on discretionary trusts

The Bearing — Here's how trusts work. And here's why the tax man wants a bigger slice

The Bearing — New tax improvements for small business benefit tax accountants

The Bearing — Why raising tax rates doesn't raise revenue in proportion

Frequently Asked Questions

What is the minimum tax on discretionary trusts and when does it start?
From 1 July 2028, a minimum 30 per cent tax rate will apply to income distributed through discretionary trusts where the beneficiary would otherwise pay less than that rate. The rate matches the corporate tax rate and is designed to close the gap between what trust beneficiaries pay and what wage earners on equivalent income pay.

Will my small business trust be affected by the new rules?
Treasury estimates fewer than 10 per cent of Australia's 2.7 million active small businesses will be affected in any given year. However, businesses near the threshold could move in and out of the regime year to year, creating an ongoing compliance burden even when the tax itself doesn't apply.

How can a trust avoid the 30 per cent minimum tax without restructuring?
The draft legislation includes an election mechanism that allows trustees to nominate fixed distributions to specific beneficiaries in advance, bypassing the minimum tax without a full restructure. This option suits trusts with predictable income streams but is less practical for small businesses whose earnings fluctuate from year to year.

Does restructuring a trust to avoid the new tax trigger stamp duty?
Treasury states the fixed-distribution election is 'not expected' to trigger state and territory stamp duties, but that is an expectation rather than a guarantee. Stamp duty is a state matter, and federal tax reforms have historically created unintended state revenue events, so professional advice will be essential before any restructure.

Why are there so many exemptions in the trust tax draft legislation?
Discretionary trusts serve a wide range of legitimate purposes beyond income splitting — estate planning, disability support, charitable giving, employee share schemes, and commercial business structures among them. The exemptions exist because the policy targets one specific behaviour, and a blunter instrument would damage structures that have nothing to do with tax minimisation.