A 30% minimum tax on trust distributions has been announced in the budget. This was previously proposed by the Australian Labor Party during the 2019 election campaign. 

Details of this measure are sketchy and further details will be revealed over the coming months. What do we know so far?

Why?

The purpose of this measure is stated to prevent income splitting. The government has noted that this proposal will still allow trusts to be used for asset protection and succession planning. 

That said, the government will be expanding rollover relief for 3 years from 1 July 2027 to all small businesses to restructure out of discretionary trusts into companies or fixed trusts. No further details have been provided. 

When?

The 30% minimum tax on trust distributions will apply from 1 July 2028. 

What trusts will be affected?

Not all trusts are caught - fixed trusts, widely held trusts, special disability funds and fixed testamentary trusts, complying superannuation funds, deceased estates and charitable trusts are specifically excluded from this announcement.

What trust income will be affected?

Not all trust income is captured either. Primary production income, amounts to which non-resident withhold tax applies, certain income relating to vulnerable minors and income from assets of a discretionary testamentary trust that exist at 12 May 2026 (budget day) will not be subject to the 30% minimum tax.

In 2019 there was a proposal for the Commissioner of Taxation to have a discretion to exempt trusts from the minimum tax in special circumstances. It is not clear whether this will be available this time as there is no mention of it in the budget papers. 

How will the 30% minimum tax on trust distribution work?

Trustees will be required to calculate, report and pay the minimum tax, as well as to notify beneficiaries of their entitlements and associated tax credits.

Trustees that receive franked dividends will be required to use their franking credits to pay the minimum tax. Details about if and how foreign income tax offsets will flow through trusts to beneficiaries are unknown at this stage.

It should be noted that that any discretionary trust distributions paid to any superannuation fund is currently taxed at 45%.  This proposal is not expected to interfere with this policy setting.

Impact on beneficiaries 

With a 30% marginal tax rate kicking in on amounts over $45,000, trust distributions to beneficiaries whose non-trust income is below $45,000 will result in them losing the benefit of the tax-free threshold and the lowest marginal tax rate of 15%. This amounts to a maximum of $9,480 per a beneficiary (if tax offsets are not considered). 

In previous estimations of revenue, the Parliamentary Budget Office has predicted that around 25% of potential revenue will not be realised by the government as people change the way trust income is distributed such as paying salary and wages to those who work in the business or directing trust income to a company who then pays franked dividends to shareholders. 

The government must have read that report too as the budget states that corporate beneficiaries will not receive non-refundable credits for tax payable by the trustee, to avoid them converting these to refundable franking credits to avoid the minimum tax. Trustees that receive franked dividends will be required to use their franking credits to pay the minimum tax. 

What changes are likely to occur?

Winding up trusts might be an option for some but unlikely to be widely used given that trusts are used for a myriad of other purposes such as income and asset protection, estate planning and there would also be substantial transaction costs in transferring assets out of a trust. A more likely scenario could be a decline in the establishment of new trusts as alternative investment vehicles are adopted.