Discretionary trusts have long been a common structure for family groups, investment holdings and small businesses. However, proposed changes from 1 July 2028 could significantly alter how trust distributions are taxed and how effective these structures remain.

Under the proposed rules, trustees of discretionary trusts would be taxed at a minimum rate of 30% on distributions. Non-company beneficiaries would receive a non-refundable tax offset, similar in concept to a franking credit, although it would not be refundable. Company beneficiaries, however, would not receive an offset, which means distributions to companies may effectively be taxed twice.

This is a major change for groups that currently distribute trust income to a company beneficiary as part of their tax planning. Based on the proposal, distributing to a company will no longer be a practical option for many discretionary trusts.

Which trusts are affected?

The proposed minimum tax applies to discretionary trusts. It does not apply to:

• Fixed trusts
• Self-managed superannuation funds
• Deceased estates
• Special disability trusts

There are also proposed exemptions for certain income, including primary production income, income relating to vulnerable minors, amounts subject to non-resident withholding tax, and income from assets of discretionary testamentary trusts that existed at the time of announcement.

A key estate planning issue is that future discretionary testamentary trusts are expected to be caught by the minimum tax rules. This may change how wills and estate plans are structured going forward.

Restructuring may need to be considered

Expanded rollover relief is expected to be available from 1 July 2027 for three years to allow affected taxpayers to change structures if necessary, although further detail is still to come on how this will work.

Some options that may need to be considered where the minimum 30% tax rate results in an increased tax bill could include paying wages to working beneficiaries to use up their lower tax rates or restructuring to a company.

What should you do now?

These changes are not immediate, but they are significant. Business owners and family groups using discretionary trusts should review their structures well before 1 July 2028.

Key issues to consider include:

• Whether the trust currently distributes income to a company beneficiary
• Whether the structure is still suitable if a 30% minimum tax applies
• Whether wages, or a company structure may be more appropriate
• Whether estate planning documents need to be reviewed
• Whether any restructure can access the proposed rollover relief

Trusts will remain useful in many circumstances, but the tax benefits may be reduced. Early planning will be important and we are here to help you find the optimal solution.