What does the Federal Budget mean for your family trust?

Families using a trust to manage money or run a small business could face a higher tax bill under new budget changes, even if their income hasn't changed.

The Federal Budget brought major changes to the taxation of discretionary trusts, including the introduction of a baseline (minimum) 30% tax rate on trust income from July 1, 2028.

Currently, trustees pay tax on income which is retained by the trust, and beneficiaries pay tax on distributions received, at the marginal tax rate applicable to them.

According to the Budget, from the 2028 commencement of these changes, trustees will, upon determining the taxable income of the trust, be required to pay tax on the income at a minimum rate of 30%, even if income is distributed to beneficiaries on lower marginal tax rates.

Individual beneficiaries will still receive distributions, however, they will now receive a non-refundable credit for any tax already paid by the trust.

There are a few exceptions for these structures such as qualifying charitable trusts, disability trusts, and superannuation funds.

In a number of respects, the consequences do not appear to have been thought through. For example, will tax be payable twice where trusts hold shares in Companies which must also pay tax at the applicable rate?

And are not beneficiaries without other sources of income unfairly penalised?

It seems that the Federal Government has made an assumption that every Trust has been established for the purposes of tax avoidance, and the Budget response is a blunt approach to punish everyone. In our experience the main reason Trusts are established is where enterprises are intended to benefit more than one person, and in nearly all cases it is different members of a family.

It is a legitimate structure for business, estate, and succession planning.

And if Testamentary Trusts (trusts established on death) are also caught then this looks like a death tax in disguise.

On any analysis, it is hard to see what was wrong with the pre-budget approach of taxing beneficiaries on income received.

And in our experience, this is not a tax on the rich, it is a tax on the middle class.

It is another tax on small business.

The Budget changes, if they are legislated into law, will require many families and businesspeople to review whether their current structure remains appropriate or whether they need to explore alternative structures.

Given the 2028 commencement date is still some time away, trustees and beneficiaries have the opportunity to seek professional advice and to consider which restructuring options should be explored before the new rules are in effect.

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