The $2.9 trillion corner of Australia's economy at the centre of a tax war

The government plans to close a tax advantage available through many discretionary trusts. It would require a minimum 30 per cent tax on their net income. The reform matters because trusts hold substantial assets and distribute income among beneficiaries, often within families.

The proposal covers about 840,000 trusts, although some types are excluded. These include deceased estates, disability trusts, superannuation trusts and charities. The government says trusts are used overwhelmingly by the top 10 per cent of income earners, who receive about two-thirds of distributions.

The changes would start on 1 July 2028. Treasury projects they will raise $4.47 billion in 2029/30. From 1 July 2027, eligible users can access rollover relief to restructure, or elect to remain exempt while following nominated-beneficiary rules.

A discretionary trust is a structure in which assets are held for beneficiaries, while trustees decide how income or property is distributed. The beneficiaries may include family members or related entities. Unlike a fixed arrangement, the trust can usually vary who receives distributions and how much.

For example, a family business might hold assets through a trust and distribute income among adult children or other nominated beneficiaries. The article says families also use trusts to protect assets, manage succession and plan for the future. Trusts can make ownership less obvious in bankruptcy or Family Court proceedings.

That flexibility is central to the dispute. The government says it can enable wealthy people to spread income or obscure asset ownership. The proposal would allow some users to elect an exemption, provided they keep distributing income to pre-nominated beneficiaries under upfront rules.

The trust sector is enormous by both asset value and income. Australian trusts collectively hold $2.9 trillion in assets and generate $600 billion in annual income, according to the article. The proposed minimum tax would apply to about 840,000 trusts, subject to exclusions for several categories.

The affected trusts are not all business structures. Treasury data shows trusts are concentrated among higher-income Australians: the top 10 per cent receive about two-thirds of trust distributions, while the bottom 10 per cent receive one per cent. Some trusts also support family businesses and succession arrangements.

The Council of Small Business Organisations Australia estimates that 350,000 family and small businesses structured this way could face a substantial tax increase or restructuring costs. The government says fewer than 10 per cent of small businesses are affected. The estimates therefore describe different measures of impact.

Wealthy families and small businesses use trusts for more than tax planning. The article lists asset protection, succession management and future planning as reasons family businesses have used them for decades. Trusts can also hold assets in a way that makes ownership less obvious during bankruptcy or Family Court proceedings.

The tax benefit comes from distributing income among beneficiaries rather than leaving it with one high-income person. For example, someone earning $200,000 or more might otherwise pay 47 per cent on extra income. Passing income through a discretionary trust to adult children or a private company can bring the rate down to 30 per cent or less, according to the article.

The government argues this creates unfairness because ordinary workers may pay 30 per cent on their next dollar while high earners reduce their rate through trusts. The proposed minimum tax would limit that advantage, although some trusts could remain exempt under nominated-beneficiary conditions.

Businesses using affected trusts would face a choice under the proposal. They could keep their existing structure and pay the new minimum tax, or restructure their affairs. Small-business groups warn that either option could make operating a family business more expensive.

Restructuring may involve professional fees, valuations, administration and duties. The article says Queensland and Western Australian businesses could be hit particularly hard because stamp duty may apply when assets are moved during restructuring. Businesses could also use rollover relief from 1 July 2027 when restructuring.

Another path is a tax election to remain exempt from the minimum tax. This would last while the trust continued making distributions to pre-nominated beneficiaries in line with an upfront nomination. The final impact therefore depends on the trust’s structure, location, distributions and response before the proposed start date.

The government and Coalition are discussing different financial consequences of the reform. Treasury projects that the minimum-tax changes will raise $4.47 billion in 2029/30. The government also says fewer than 10 per cent of small businesses are affected and offers relief or exemption pathways.

The Coalition’s figure is much larger because it focuses on costs imposed on businesses. Opposition treasury spokesperson Tim Wilson says small and family businesses could face up to $13.3 billion for valuations, advisers and stamp duty. Small-business groups separately warn of restructuring costs running into thousands of dollars for individual firms.

These estimates are not direct equivalents. One measures expected government revenue from changed tax treatment. The other includes possible private-sector costs across many businesses, such as professional advice and duties. The political divide reflects disagreement about how many firms are genuinely affected and whether the policy targets tax avoidance or legitimate structures.

In a progressive income-tax system, tax rates rise across income bands. The key rate for an additional dollar is the marginal rate: the percentage applied to the band containing that dollar. It does not mean every dollar of total income is taxed at the highest rate reached.

The article gives a practical comparison. Someone earning $200,000 or more would usually pay 47 per cent tax on extra income. An average worker, meanwhile, may pay tax at a rate of 30 per cent on the next dollar earned. These examples explain why directing income to beneficiaries with lower rates can reduce the overall tax paid.

The trust proposal would impose a minimum 30 per cent tax on covered trust income. Its stated purpose is to stop high earners reducing their tax rate below that level through discretionary distributions. The article does not provide the full tax brackets or thresholds.