Tax Planning & Family Trusts

How the Proposed 30% Trust Tax Could Change Family Trust Distribution Strategies

Proposed trust tax changes from 1 July 2028 may significantly impact discretionary trusts, bucket companies and family group distribution strategies across Australia.

For many Australian business owners and investors, discretionary trusts have long been used for tax planning, asset protection and wealth distribution. However, the proposed changes to trust taxation from 1 July 2028 could significantly reshape how family groups use trusts moving forward.

Under the proposed rules, discretionary trusts may be subject to a minimum 30% tax on taxable trust income. While legislation is still developing, the direction is clear: family groups and small businesses should start reviewing their structures well before the changes take effect.

What Is the Proposed 30% Trust Tax?

From 1 July 2028, trustees of discretionary trusts may be required to pay a minimum 30% tax on trust income before distributions are assessed to beneficiaries.

Under the proposal:

• The trustee calculates and pays a 30% minimum tax on taxable trust income.
• Individual beneficiaries who receive trust distributions include that income in their personal tax return.
• Beneficiaries receive a non-refundable tax credit for their share of the 30% tax already paid by the trust.
• If the beneficiary’s marginal tax rate is above 30%, additional tax may still be payable.
• If the beneficiary’s tax rate is below 30%, the excess credit generally cannot be refunded.

This creates a very different outcome compared to the current flexibility many family trusts rely on today.

Why Bucket Company Strategies May Become Less Effective

One of the biggest impacts of the proposed trust tax changes is on the common use of “bucket companies”.

Traditionally, many family groups distribute excess trust income to a corporate beneficiary to cap tax at the company tax rate and retain profits within the group for future investment.

Under the proposed rules, however:

• The discretionary trust pays 30% tax first.
• Corporate beneficiaries may not receive a credit for tax paid by the trustee.
• When profits are later paid out by the company as dividends, further tax consequences may arise.

In practice, this could significantly reduce the effectiveness of traditional bucket company planning strategies and increase overall tax leakage within family groups.

What Trust Owners Should Be Reviewing Now

Although the legislation is not yet finalised, proactive planning is important. Waiting until 2028 may leave limited time to restructure effectively.

Are Family Trusts Still Worth Using?

Despite the proposed changes, discretionary trusts are unlikely to disappear.

Trusts can still provide valuable benefits including:

• Asset protection
• Succession planning flexibility
• Estate planning advantages
• Access to certain small business CGT concessions
• Flexibility for family group ownership

However, the tax outcomes and planning strategies around trusts may look very different going forward.

Disclaimer: This article contains general information only and should not be relied upon as personal taxation advice. Tax advisory and lodgement services are provided under the supervision of a registered Australian Tax Agent.