The recent Federal Budget has brought discretionary (family) trusts firmly back into the spotlight, with proposed changes that could reshape how these structures are used over the coming years.
At the centre of the announcement is a proposal to introduce a minimum 30% tax on discretionary trust income, expected to apply from 1 July 2028. While not yet legislated, the measure signals a clear shift in policy direction.
Traditionally, discretionary trusts have offered flexibility, particularly the ability to distribute income across family members on lower marginal tax rates. This has made them a popular vehicle for investment, asset protection, and succession planning.
However, under the proposed changes, this flexibility may become less effective from a tax perspective. The new rules would effectively establish a tax floor, meaning that even where income is distributed to lower-income beneficiaries, the overall tax outcome may not fall below 30%. Previously the distributions would be taxed at the recipients marginal tax rate and benefiting from tax-free thresholds.
Importantly, the Government has been clear that trusts will continue to play a role in areas such as asset protection and intergenerational wealth planning. The intent appears less about eliminating trusts altogether, and more about reducing the tax advantages associated with income splitting.
In addition, a three-year restructuring window from 1 July 2027 has been proposed, allowing individuals and families time to review and, where appropriate, adjust their structures. This suggests an expectation that many existing arrangements may need to reviewed and potentially restructure depending on the goals of why the trust was initially established.
It’s also worth noting that these changes come alongside heightened ATO scrutiny of trust distributions in recent years, particularly around whether beneficiaries genuinely receive and benefit from trust income.
While the detail is still developing, the broader message is clear: the tax landscape for trusts is shifting, and long-standing strategies may not deliver the same outcomes in the future.
For many families, discretionary trusts will remain appropriate. For others, it may be an opportune time to revisit how structures are configured and whether they continue to align with long-term objectives.
As always, changes of this nature are best considered in the context of your broader financial position. A proactive review, even at a high level can help ensure your arrangements remain fit for purpose as the rules evolve.
