The Australian government has introduced legislation that will impose a minimum 30% tax on income distributed through discretionary trusts, marking a significant shift in the country’s tax framework. Treasurer Jim Chalmers unveiled the bill on Wednesday as part of what he described as the most comprehensive tax reform in a generation, aiming to address longstanding concerns about tax inequities associated with discretionary trusts.

Discretionary trusts, which allow trustees to allocate income from assets such as businesses, property, or shares to beneficiaries at their discretion, are commonly used by wealthier families to reduce tax liabilities. Unlike fixed trusts, where beneficiaries’ shares are predetermined, discretionary trusts provide flexibility in income distribution, often benefiting lower-income family members by shifting income to them. This flexibility has been criticized for enabling tax avoidance and contributing to unequal tax burdens.

According to government analysis, fewer than 5% of taxpayers earn income from trusts, with the majority of benefits accruing to the top 10% of income earners. Treasury estimates that in 2022-23, families using discretionary trusts had an average tax rate approximately four percentage points lower than those of comparable income without trusts. This disparity has prompted calls for reform from economists and tax experts.

The new rules, effective from mid-2028, will require discretionary trusts to pay a minimum tax rate of 30% on income distributed to beneficiaries, eliminating the tax advantage for those in lower tax brackets, such as university students or non-working spouses. The government projects the measure will raise about AUD 4.5 billion in the 2029-30 financial year, with the revenue to fund tax cuts aimed at workers.

However, the changes have met resistance from business groups and some lawmakers, who warn of unintended consequences and increased costs. The Australian Chamber of Commerce and Industry (ACCI) estimates that around 210,000 to 240,000 small businesses operating through discretionary trusts will be affected, potentially facing expensive and complex restructuring to avoid the new tax. ACCI highlights the burden of legal, accounting, and financial advice fees, which could run into billions of dollars collectively, exacerbating pressures on small businesses already grappling with high costs and economic challenges.

In response to these concerns, recent amendments to the bill allow trustees to make fixed distributions to pre-selected beneficiaries, effectively converting discretionary trusts into fixed trusts exempt from the minimum tax. This option aims to provide a less costly alternative to full restructuring. The government has also introduced a three-year rollover relief period from capital gains and other income tax consequences for businesses choosing to restructure. Additionally, donations from discretionary trusts to sporting and community organizations will be exempted from the new rules.

State-level stamp duty on trust restructures remains an unresolved issue, with the government engaging in discussions to seek waivers for affected businesses.

Despite firm opposition from the Coalition and concerns raised by small business advocates, the legislation is expected to pass with support from the Greens, who generally back measures designed to improve tax fairness. Nevertheless, Greens economics spokesperson Nick McKim has voiced reservations about certain exemptions, such as the treatment of private school fee payments, indicating ongoing debate over the details of the reform.

The government’s push to tighten taxation of discretionary trusts underscores a broader effort to close perceived loopholes and create a more equitable tax system, though it must navigate the complexities and costs faced by affected families and businesses.