Explainer: How Australia's New 30% Tax on Trusts Will Work

The Albanese Government has introduced legislation that will fundamentally change the taxation of discretionary trusts in Australia.

From 1 July 2028, income earned through most discretionary trusts will face a minimum tax rate of 30%, regardless of how that income is distributed among family members.

The Government expects the measure to raise approximately $4.47 billion in 2029–30. But critics warn that it could impose significant costs on small businesses and families that use trusts for legitimate commercial reasons.

What is a discretionary trust?

A discretionary trust is a legal arrangement in which a trustee holds assets or operates a business for the benefit of others, usually family members.

Its distinguishing feature is flexibility. The trustee can decide each year how much income to allocate to different beneficiaries.

This creates opportunities for income splitting. For example, investment income can be distributed to family members with lower taxable incomes, reducing the family's combined tax bill.

Trusts also serve legitimate purposes, including protecting assets and transferring businesses between generations.

Australia has approximately 840,000 discretionary trusts, which distributed $142.4 billion in income during 2022–23.

How will the new tax work?

Currently, trust income distributed to beneficiaries is generally taxed at their individual marginal rates.

Under the proposed legislation, the trustee would first pay tax equivalent to 30% of the trust's taxable income.

Individual beneficiaries would continue to declare their trust income and receive non-refundable tax credits recognising the tax already paid.

This means beneficiaries with personal tax liabilities below 30% of their allocated trust income cannot recover the difference. Those with higher liabilities may still pay additional tax.

The distinction is important: 30% becomes a minimum tax on affected trust income, not a replacement for higher personal tax rates.

A worked example

Consider a discretionary trust earning $200,000 annually from investments. The trustee distributes $100,000 each to two adult beneficiaries with no other taxable income.

Using the income-tax brackets applying from 2027–28, and excluding Medicare and other offsets, each beneficiary would ordinarily pay $20,252 in income tax.

Total family tax: $40,504.

Under the proposed rules, the trustee pays $60,000. Each beneficiary receives a $30,000 non-refundable tax credit, eliminating their individual income-tax liability but providing no refund.

The family's total tax therefore increases to $60,000 — an additional $19,496 annually.

Who will be affected?

Treasury estimates that more than 95% of individual taxpayers and more than 90% of small businesses will be unaffected in any given year.

Exemptions include fixed trusts, charitable trusts, special disability trusts, certain testamentary arrangements and primary production income.

Affected trusts could also elect to make distributions to nominated beneficiaries in specified proportions, avoiding the minimum tax while sacrificing flexibility. Alternatively, businesses could restructure into companies or fixed trusts, with transitional income-tax rollover relief.

Neither option is necessarily costless.

Is this good tax policy?

The Government has a legitimate concern. Treasury estimates that families using discretionary trusts face average tax rates approximately four percentage points below comparable families without trusts.

But the proposed solution raises another question.

Australia's personal income-tax system deliberately applies lower rates to lower incomes. Imposing a 30% minimum on trust income removes those concessions, even where beneficiaries genuinely receive modest incomes.

There is also a risk that restructuring and compliance costs consume some of the economic benefits.

The fundamental policy objective should be tax neutrality: similar economic activities should face similar taxation regardless of legal structure.

Whether the new trust tax achieves that objective, rather than creating another set of distortions, is the central question Parliament needs to answer.