New trust tax could force families into a tough choice

A proposed 30% minimum tax on discretionary trusts could reshape how Australians pass on wealth, forcing families to choose between tax efficiency and protecting vulnerable loved ones.

It is part of a broader tax overhaul announced in the Federal Budget, one that the Government says is among the biggest in decades.

For Australians with estate plans built around discretionary trusts, the implications are profound.

What this means for you

• A 30% minimum tax could apply to trust income
• Some existing estate plans may not be protected
• Restructuring could reduce tax but limit flexibility
• Families protecting vulnerable beneficiaries may be hardest hit

What is actually changing

From July 1, 2028, a 30% minimum tax will apply to the taxable income of discretionary trusts, payable by the trustee.

Separately, from July 1, 2027, the 50% CGT discount is replaced by cost base indexation, with a 30% minimum tax on real capital gains.

Pre-1985 assets - historically CGT-exempt, will be brought into the regime for gains accruing from July 1, 2027.

Negative gearing for established residential properties will be restricted to new builds, and grandfathering will not pass to successor holders on death.

Fixed trusts, special disability trusts, deceased estates, and income from assets of testamentary trusts existing at announcement are excluded.

Certain income relating to "vulnerable minors" is also exempt - though that term remains undefined.

Why this hits families, not just the wealthy

The Budget frames discretionary trusts as vehicles for tax minimisation.

But for the majority of families we advise, the primary purpose is protection: of children with gambling addictions, beneficiaries with disabilities, spendthrifts, minors, and those in abusive/controlling relationships.

Tax efficiency is a secondary benefit.

The Government itself acknowledges trusts serve "legitimate family and commercial arrangements, including as a collective investment vehicle, for asset protection and for succession planning."

Yet the 30% minimum does not distinguish between income-splitting for wealthy adult children and protecting a person who cannot manage their own affairs.

Who is most affected?

• Families using trusts to support children or dependents
• Beneficiaries with disabilities or limited financial capacity
• Estate plans relying on flexibility over time
• Property investors using trust structures

The tough choice families now face

Families now face a stark choice: maintain a discretionary trust and accept the 30% tax cost as the price of protection, or restructure into a fixed trust or outright gift to reduce tax - but leave the vulnerable beneficiary exposed to their own poor judgment, predatory third parties, and creditors.

For a beneficiary on a disability pension with no other income, the non-refundable credit offered by the new regime is effectively worthless.

Plans that may be locked in

Many wills containing discretionary testamentary trusts were made by people who now lack capacity.

Their plans are locked in.

The grandfathering applies to trusts "existing at announcement" - but a testamentary trust contingent on the testator's death does not yet exist.

These families face either the new tax or the costly, uncertain prospect of a statutory will application to the Supreme Court

Why grandfathering may not help

Fixed testamentary trusts are excluded from the minimum tax.

But converting a discretionary trust to a fixed trust requires the testator to decide now, irrevocably, how income and capital will be distributed for decades.

It removes the very flexibility to respond to changing needs, which made the discretionary structure appropriate.

Is this effectively a new inheritance tax

Australia abolished death duties in 1979.

But when trust income is taxed at a 30% minimum, capital gains face a separate 30% floor, and pre-1985 assets are brought into the CGT net, the cumulative effect on inherited wealth is difficult to distinguish from one.

The Government's rationale is to align trust taxation with "the rates paid by workers and families who earn a living from wages."

But inherited wealth has already been taxed through income tax, GST, and stamp duty during the lifetime of the person who earned it.

Why the 30% floor hits harder than it appears

The word "minimum" warrants emphasis.

It is a floor, not a ceiling.

For a vulnerable beneficiary on the tax-free threshold, it transforms their effective rate from zero to 30%.

The Government exempts income support recipients from the CGT minimum tax to avoid disadvantaging those with "low income and low wealth."

Why does the same logic not extend to the trust minimum tax for distributions to persons with permanent disability who fall outside the narrow special disability trust framework?

What families should do next

The consultation process remains open.

From an estate planning perspective, there is much to watch and wait for, including how the Government defines "vulnerable minors," the mechanism for collecting the tax, and the scope of rollover relief.

But families should not wait passively. Turn your mind now to what can be done.

Weigh up the options with your advisers.

If the primary goal of your estate plan remains the protection of beneficiaries who cannot protect themselves, namely the addict, the spendthrift, the person without capacity, the minor,  then perhaps nothing needs to change.

The 30% tax may simply be the cost of that protection.

If, however, the primary goal is tax minimisation, then further discussions need to be had about restructuring into fixed trusts or other arrangements before the relief window closes on June 30, 2030.

Either way, the conversation with your estate planning adviser cannot wait.

These are the most significant reforms to the taxation of inherited wealth in Australia in more than 25 years, and every existing estate plan deserves a fresh review in light of them.

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