A Trust’s $80,000 Tax Test: Student Versus Bucket Company

From 1 July 2028, the Albanese Government proposes a 30 per cent minimum tax on discretionary trusts. A simple $80,000 distribution shows why the legislation has become contentious.

Assume a trust has $80,000 of taxable income in 2028–29. It allocates the entire amount either to an adult university student with no other income or to a bucket company — a private company used to accumulate trust profits.

First, the student. Under ordinary 2028–29 tax rules, without the reform, the student would pay $14,252 in income tax and $1,600 in Medicare levy: $15,852 altogether. That is an average rate of 19.8 per cent, although the marginal rate on the last dollar is 32 per cent including Medicare.

Under the proposal, the trustee pays $24,000 upfront. The student receives a non-refundable tax offset, which eliminates their $14,252 personal income-tax liability. But the unused $9,748 cannot be refunded or applied against Medicare. Including the $1,600 levy, total tax rises to $25,600 — an effective 32 per cent.

Now the bucket company. Assume it pays the standard 30 per cent company tax rate. Without the reform, its $80,000 trust entitlement attracts $24,000 company tax. Under the proposed rules, the trustee first pays $24,000, and the company still pays another $24,000. Unlike an individual, the company receives no offset. The combined tax doubles to $48,000, or 60 per cent, before any subsequent dividend taxation.

The Government wants to prevent income splitting and the accumulation of lightly taxed profits. That objective is understandable. But these examples expose an important design choice: the tax burden depends heavily on the beneficiary’s legal form.

Some trusts can elect fixed distributions or restructure to avoid the new regime. Both options may sacrifice flexibility or entail costs. The question for Parliament is whether preventing avoidance requires such markedly different outcomes on the same $80,000.