Changes to the Taxation of Family Discretionary Trust

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Family (discretionary) trusts have long been a popular structure for asset protection, succession planning and income distribution. Under the current system, trust income is generally distributed to beneficiaries, who pay tax at their individual marginal tax rates.

The Australian Government has introduced reforms that will significantly change the taxation of discretionary trusts. From 1 July 2028, trustees of discretionary trusts will generally be required to pay a minimum tax of 30% on the trust's taxable income. Individual beneficiaries will generally receive a tax credit for the tax already paid, while different rules apply to corporate beneficiaries. The Government has stated that the reforms are intended to improve the fairness of the tax system by reducing the tax advantages previously available through income splitting.

These changes may affect many family-owned businesses, investment structures and family investment trusts. While trusts will continue to offer important benefits, such as asset protection and estate planning, families should review whether their existing structures remain appropriate in light of the new tax rules.

If you operate a family trust or are considering establishing one, it is advisable to obtain legal and taxation advice before the new regime commences to ensure your structure continues to meet your commercial and succession planning objectives.