And the biggest mistake clients can make right now is assuming this simply means: "Trusts will pay 30% tax."
That is not what the proposal appears to do.
The proposal is closer to a trust-level withholding or prepayment system designed to ensure discretionary trust income bears a minimum effective tax rate of around 30%.
The real issue is not the headline tax rate.
The real issue is: wasted credits, reduced income splitting effectiveness, and the potential death of the traditional bucket company strategy.
How the Government Intend the Proposed Trust Tax to Work
From 1 July 2028:
- the trustee pays a minimum 30% tax;
- beneficiaries still include the income in their own tax returns;
- non-corporate beneficiaries receive a non-refundable credit;
- corporate beneficiaries do not receive the credit.
That last point is potentially enormous.
The Real Problem: Low Income Beneficiaries
Historically, discretionary trusts have allowed business owners to distribute income across family members on lower marginal tax rates.
That is now directly under attack.
Under the proposal, if the trust pays 30% tax and the beneficiary's actual tax liability is lower than 30%, the excess credit is lost.
That means the traditional strategy of distributing profits to spouses, adult children, retired parents, university-aged beneficiaries, or low-income family members becomes dramatically less effective.
Practical Example: Low Income Beneficiary
Assume: business profit through trust = $300,000, distributed as $100,000 to each of 3 adult beneficiaries with minimal other income.
Current Rules
Approximate tax per person
$23,000
Personal tax + Medicare. Total across 3 beneficiaries: $69,000. Effective rate: 23%. Family keeps benefit of lower marginal rates.
Proposed Rules
Trust pays 30% minimum tax
$90,000
Actual beneficiary tax only ~$69,000. Excess $21,000 credit wasted. Effective minimum tax: 30%. Income splitting advantage largely disappears.
The Breakeven Point Matters
This is where business owners need proper modelling.
Technically, the marginal rate reaches 30% at around $45,000 taxable income. But due to the tax-free threshold, lower marginal brackets, and Medicare interactions, the actual economic breakeven point is materially higher.
In the absence of other structuring options, beneficiaries generally need taxable income around $200,000 before the 30% trust credit is substantially utilised.
| Beneficiary Income | Likely Outcome |
|---|---|
| Under $45k | Major wastage of credits |
| $45k to $100k | Moderate wastage |
| $100k to $150k | Some wastage |
| $150k+ | Most credits utilised |
| $190k+ | Additional top-up tax |
This is one of the most significant structural changes to discretionary trust planning in decades.
Why Bucket Companies Are in Trouble
This is the part many business owners still do not understand.
Under current structures: trusts distribute surplus profits to a company, tax is capped at 25% or 30%, and profits are retained and reinvested.
That strategy is effectively dead.
Under the proposal, the trust pays 30% minimum tax, the company still includes the income, and the company does NOT appear to receive the trust tax credit. Unless softened through legislation, this creates the risk of double taxation.
Example: Bucket Company Exposure
Assume: trust distributes $100,000 to bucket company.
| Layer | Tax |
|---|---|
| Trust minimum tax | $30,000 |
| Company tax (25%) | $25,000 |
| Combined tax before dividends | $55,000 |
And that is before eventual shareholder dividends.
This is why many advisers are now questioning whether companies should operate businesses directly, whether trusts should instead become asset protection or control vehicles only, or whether hybrid structures become more appropriate.
When a Company Structure May Become Better
Under the old system, many SMEs operated through discretionary trusts because income splitting worked, bucket companies worked, and flexibility existed. Under the proposed regime, that equation changes.
For some businesses, operating directly through a company taxed at 25%, paying commercial salaries to owners, and retaining profits for growth may become more tax efficient and administratively cleaner.
Particularly where profits are consistently retained in the business, family distribution planning is limited, beneficiaries are already on high incomes, or the trust primarily exists for tax arbitrage.
That does NOT mean "everyone should move to companies." This is where dangerous advice starts.
Structure Decisions Still Involve
- asset protection
- succession
- Division 7A
- financing
- land tax
- payroll tax grouping
- CGT concessions
- estate planning
- business sale strategy
- and control of family wealth
The answer is not: "Trusts are dead."
The answer is: "The role of trusts may fundamentally change."
Questions Every Business Owner Should Be Asking Now
- Are we still getting real benefit from discretionary trust distributions?
- Which beneficiaries are now inefficient?
- Do we rely on bucket companies?
- What is our Division 7A exposure?
- Would a company operating structure now produce better long-term outcomes?
- Should the trust become a holding or control vehicle only?
- What happens if we sell the business in the next 3 to 5 years?
- How does this interact with Small Business CGT concessions?
- Do we need a full structure review before 30 June 2027?
The biggest risk now is not overpaying tax tomorrow.
It is sitting in a structure that no longer achieves the reason it was created in the first place.
This article is general in nature and does not constitute financial, legal, or taxation advice. The proposals discussed are subject to legislative change and have not yet been passed into law. Please consult a qualified adviser before making any decisions regarding your business structure.
