Are family trusts still worth it?

A major tax crackdown could strip family trusts of one of their biggest advantages. But buried in draft legislation is a little-known loophole that could help some families avoid the hit.

For decades, family trusts have been a favourite structure for Australian investors, business owners and wealthier families.

There are good reasons for that. A discretionary trust can provide asset protection, assist with succession planning and, crucially, give the trustee flexibility over which family members receive income from year to year.

But the Federal Government's proposed new 30% minimum tax on discretionary trusts threatens to significantly reduce one of their biggest attractions: the ability to distribute income to family members on lower tax rates.

So, are family trusts still worth it?

In many cases, I think the answer will still be yes. But the calculation is becoming much more complicated - and a major change contained in draft legislation released in September means trust owners shouldn't rush into restructuring just yet.

What's changing for family trusts?

Under reforms announced in the 2026 Federal Budget, a 30% minimum tax is proposed to apply to income earned through discretionary trusts from July 1, 2028.

The Government's target is income splitting.

At present, the trustee of a typical family discretionary trust can decide which beneficiaries receive the trust's income each year.

Consider a family where one spouse earns $200,000 and the other earns $30,000.

If the family has investment or business income sitting in a discretionary trust, the trustee may currently be able to distribute more of that income to the lower-income spouse.

Similarly, distributions might be made to adult children at university or in the early stages of their careers, when their marginal tax rates are relatively low.

That flexibility can produce significant tax savings.

It is precisely what the Government is trying to curtail.

The proposed rules effectively create a 30% floor on the tax applying to affected trust income, although the mechanics are considerably more complicated than simply taxing every trust distribution at 30%.

Importantly, this is still draft legislation. The final rules may change before they become law.

A major new option for family trusts

The most interesting development came on September 3, when the Government released the first tranche of exposure draft legislation.

It contains an option that wasn't in the original Budget announcement and could make a big difference to thousands of existing family trusts.

Rather than paying the minimum tax or restructuring, an existing discretionary trust could potentially elect to become what the draft legislation calls an "excluded election trust".

In effect, the family gets to keep its existing trust but agrees in advance who will receive the trust's income and capital, and in what proportions.

Those proportions have to add up to 100%, and the nominated beneficiaries' proportions of income and capital must be the same.

Most importantly, the arrangement isn't intended to be something families rewrite each year according to who has the lowest tax rate.

The distribution policy is effectively set in stone.

In return, the trust can remain outside the proposed minimum-tax regime.

That's potentially a very valuable concession. But families need to understand what they're giving up to get it.

The price is flexibility

Imagine parents with three adult children.

Today, their family trust might distribute income differently every year according to the circumstances of each child.

One child might be studying and earning very little. Another might be earning $150,000. The third might be overseas.

Five years later, their circumstances could be completely different.

That's exactly where a discretionary trust comes into its own.

Under the proposed election, the family might instead decide that Mum receives 20%, Dad receives 20% and each of their three children receives 20%.

That could allow the trust to avoid the minimum-tax regime.

But those proportions would effectively be locked in indefinitely.

This creates a question that is bigger than tax: how confident are you that today's family circumstances will still make sense in 10, 20 or 30 years?

Families change. Children marry and divorce. Relationships break down. People become bankrupt. Beneficiaries move overseas. A child expected to take over the family business might choose an entirely different career.

The tax saving from fixing distributions could look attractive in 2028 but prove restrictive decades later.

Should you just accept the 30% tax?

Possibly.

That's one of the things I think will surprise some trust owners.

Paying the minimum tax won't necessarily make a family trust pointless.

If trust income is already being distributed predominantly to beneficiaries paying tax at 30% or more, the difference may be much smaller than expected.

For families that don't use their trust aggressively for income splitting, retaining complete discretion and accepting the new tax treatment might actually be the most sensible option.

By contrast, families that routinely distribute significant amounts to adult beneficiaries on low marginal tax rates are likely to feel the reforms much more sharply.

Every trust will need to be modelled individually.

What about moving everything into a company?

This will inevitably be suggested as the simple solution, but I'd be wary of assuming a company is automatically better.

Companies can be very effective structures, particularly for businesses that retain profits to fund future growth.

But companies have disadvantages too.

Companies don't receive the general 50% CGT discount available to individuals and trusts. And while company tax may initially be paid at 25% or 30%, getting those profits into the hands of shareholders can produce additional personal tax through the dividend system.

A trust can also provide asset-protection and succession-planning advantages that a company may not replicate in quite the same way.

In other words, comparing "30% trust tax" with "25% company tax" and choosing the lower number is not sensible tax planning.

You have to consider what happens to the money eventually, not simply the tax rate paid by the entity in year one.

The Government is offering a way out

Trust owners who decide the new regime no longer works for them may also get an opportunity to restructure.

The draft legislation provides expanded CGT rollover relief for three years from 1 July 2027.

That could allow some families to move assets out of a discretionary trust and into another structure without triggering the immediate federal tax bill that might otherwise make restructuring prohibitively expensive.

But CGT isn't the only consideration.

State stamp duty could still be an issue, as could finance arrangements, licences, contracts and other regulatory requirements for businesses.

That's particularly important where the trust owns property.

The Federal Government says the new fixed-distribution election itself won't require a restructure and isn't expected to trigger state and territory stamp duty.

However, questions have already been raised about how state revenue authorities will treat changes to beneficiaries' economic entitlements, and some states have not ruled out duty consequences.

So I wouldn't recommend making an irrevocable decision affecting a valuable trust until the state tax position is much clearer.

Not every trust will be caught

Another misconception worth clearing up is that every trust in Australia is suddenly going to pay at least 30% tax.

That's not what is proposed.

The Government has confirmed exclusions for a range of structures and circumstances, including charitable trusts, special disability trusts, superannuation funds, deceased estates and genuine discretionary testamentary trusts.

Primary production income is also intended to be excluded.

The exposure draft also introduces a new definition of a fixed trust so that various commercial trusts without material discretionary elements aren't inadvertently dragged into the regime.

This makes it important to establish exactly what type of trust you have before contemplating major changes.

Three choices are emerging

For many families with an existing discretionary trust, I think the decision will eventually boil down to three broad choices.

Keep the discretion and accept the tax

This preserves the flexibility to change distributions as family circumstances change, but affected income faces the new minimum-tax regime.

Keep the trust but fix the distributions

The proposed election could keep an eligible existing trust outside the minimum tax, but the beneficiaries and their respective shares would effectively be locked in.

Restructure

The three-year rollover window could provide an opportunity to move into another structure, but CGT rollover relief doesn't necessarily eliminate stamp duty, legal costs or other commercial consequences.

There won't be one answer that's right for everybody.

So, are trusts still worth it?

Yes - for many Australians they will be.

What is changing is the assumption that a discretionary trust is automatically the best structure for anybody building significant wealth.

The tax advantages of trusts have always attracted attention, but tax isn't their only purpose.

A well-structured trust can protect assets, facilitate the transfer of wealth between generations and allow a family to adapt as its circumstances change.

Those benefits still have value.

The question from 2028 will be how much you're prepared to pay for them.

For some families, accepting a 30% minimum tax in return for retaining complete discretion could be worthwhile. Others may be comfortable nominating beneficiaries and locking in their entitlements. And some will conclude that the trust has served its purpose and use the proposed rollover relief to restructure.

The most important thing right now is not to panic.

The legislation remains in draft form, consultation is continuing and further legislation covering administration and integrity measures is still to come.

But I wouldn't ignore the changes either.

Anyone with significant investments or a business inside a discretionary trust should use the period between now and 2028 to understand why the trust exists, who actually benefits from it and how important its flexibility really is.

The family trust isn't dead.

But the days when "set up a family trust" was almost a default piece of tax planning advice may well be coming to an end.

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