Minimum 30% tax for discretionary trusts

Discretionary trusts have been slapped with a 30% minimum tax amid a slew of "fairer tax arrangements" reforms in the 2026-27 Budget to address intergenerational inequity.

From 1 July 2028, Treasurer Jim Chalmers proposes to introduce the new tax that will be paid by trustees given they control distributions.

Beneficiaries will still need to declare the income in their tax returns. Beneficiaries, other than corporate beneficiaries, will receive non-refundable credits for the tax payable by the trustee, which can be used to offset current year income tax liabilities.

"The minimum tax will mean a fairer rate of tax is paid on income from discretionary trusts, more closely aligning the tax rates for trusts with the rates paid by workers who earn a living from wages," he explained.

Fixed trusts, including fixed testamentary trusts, will not be subject to the minimum tax. The minimum tax will also not apply to other types of trusts. This includes widely held trusts, complying superannuation funds, special disability trusts, deceased estates and charitable trusts.

Exemptions also apply to primary production income, certain income relating to vulnerable minors, amounts to which non-resident withholding tax applies, and income from assets of discretionary testamentary trusts existing at announcement.

The overhaul comes off the back of the number of discretionary trusts more than doubling over the past 20 years.

The Australian Taxation Office estimates there were 1.02 million registered trusts in the 2023 financial year that made total business income of $489 billion.

While there are legitimate reasons to use trusts, such as succession planning and asset protection, Chalmers reasoned that such arrangements "provide opportunities to pay a lower rate of tax that are not available to most workers."

Treasury modelling shows the wealthiest 10% of households hold over 90% of the value of private trusts, the majority of which are discretionary trusts.

Chalmers said rollover relief will be available to assist small businesses and others that wish to restructure out of discretionary trusts into another entity type, such as a company or fixed trust.

"This will provide relief from income tax consequences of restructuring, including tax on capital gains, and will be available for three years from 1 July 2027," he said.

Chalmers has yet to consult with stakeholders on details of this policy, including the mechanism for collecting the minimum tax on trusts, how trustees use excess franking credits and details of rollover relief for restructuring.

"These reforms will make the tax system fairer and more sustainable, and help fund tax cuts as well as the essential services Australians rely on," he added.

In the lead up to Budget night, Chalmers sold reforms to discretionary trusts, along with capital gains tax discount and negative gearing, as strengthening intergenerational equity.

As the population ages there will be a higher tax burden on a declining share of working age Australians, he said, adding the current tax settings make it harder for many Australians, including young Australians, to get into the housing market.