Discretionary trusts have long been an important structure for Australian business owners, investors and families because of the flexibility they can provide when distributing trust income among eligible beneficiaries.

However, proposed changes to Australia’s tax system could significantly affect how some discretionary trusts are used in the future.

In The CEO Breakdown episode, Latitude Accountants’ John Saade discussed the Government’s proposed 30% minimum tax rate for discretionary trusts and the potential implications for business owners who currently rely on the flexibility of these structures.

The issue is particularly important because changing a trust structure can have tax, legal, and state-based consequences. While the proposed reforms include rollover relief to help eligible taxpayers restructure, business owners should not assume that moving from a trust to another structure will automatically be simple or tax-free.

So, what are the proposed changes, and what should Australian business owners consider?

What Is a Discretionary Trust?

A discretionary trust is a structure where the trustee generally has discretion over how trust income or capital is distributed among eligible beneficiaries, subject to the terms of the trust deed and applicable tax rules.

This flexibility can be useful for families and business owners because the trustee may be able to distribute income between beneficiaries in different proportions, depending on their circumstances and the rules applying to the trust.

Discretionary trusts can be used for a range of purposes, including:

• Holding investments
• Operating or owning business interests
• Managing family wealth
• Distributing income among eligible beneficiaries
• Supporting asset protection strategies
• Providing flexibility in tax planning

However, trusts are not suitable for every situation, and their effectiveness depends on how they are structured and managed.

What Are the Proposed Discretionary Trust Tax Changes?

The Australian Government has proposed introducing a minimum tax rate of 30% for discretionary trusts from 1 July 2028, subject to specified exceptions. Treasury also says rollover relief will be available for three years from 1 July 2027 to support small businesses and others who want to restructure.

These proposed changes are significant because one of the traditional attractions of a discretionary trust is the ability to determine how income is distributed among eligible beneficiaries.

If the proposed rules reduce the tax advantages associated with flexible distributions, some existing trust structures may need to be reviewed.

However, business owners should avoid making structural changes based solely on headlines.

The final legislation, exemptions, and practical application of the rules are important.

Why Are the Proposed Changes Significant for Business Owners?

The potential impact goes beyond simply asking whether a trust will pay more tax.

Business owners need to consider whether the proposed changes could affect the reason they established a discretionary trust in the first place.

For example, a trust may have been established to provide flexibility in distributing income between family members.

If that flexibility becomes less valuable under the new rules, the business owner may need to reconsider whether the existing structure remains appropriate.

This does not necessarily mean every discretionary trust should be replaced.

The right decision depends on the trust’s assets, income, beneficiaries, business activities, existing arrangements and long-term objectives.

How Discretionary Trusts Have Traditionally Provided Flexibility

One of the key characteristics of a discretionary trust is that eligible beneficiaries generally do not have a fixed entitlement to trust income before the trustee makes a distribution.

This can allow trustees to consider the circumstances of beneficiaries when determining distributions.

For example, a family trust may have multiple eligible beneficiaries, and the trustee may distribute income between them in accordance with the trust deed and applicable tax rules.

This flexibility has historically been an important consideration when families and business owners choose a trust structure.

Proposed changes could make that flexibility less valuable in some circumstances.

Could the Changes Affect the Purpose of Some Discretionary Trusts?

Potentially.

John Saade discussed the concern that if discretionary trusts are subject to a minimum 30% tax rate, some of the reasons for maintaining a discretionary structure could change.

This does not mean discretionary trusts will become useless.

Trusts can serve purposes beyond tax planning, including:

• Asset ownership
• Succession planning
• Family wealth management
• Business structuring
• Asset protection considerations
• Control and governance arrangements

However, business owners should review the original purpose of their trust and determine whether that purpose remains relevant under the proposed rules.

What About Fixed Distributions?

One of the issues discussed in the CEO Breakdown episode was a proposed mechanism involving fixed distributions to pre-nominated beneficiaries.

The concept is important because it could provide an alternative pathway for some trustees rather than simply requiring them to abandon their existing structures.

However, the practical and legal implications of making distributions fixed need to be carefully considered.

A business owner should not assume that changing a distribution arrangement is simply an accounting decision.

It may have broader implications for:

• Trust flexibility
• Beneficiary entitlements
• Asset protection
• Estate planning
• Legal rights
• Tax outcomes

This is why professional accounting and legal advice can be particularly important when considering any trust restructuring.

What Is Rollover Relief?

The Government has proposed rollover relief to support eligible small businesses and other taxpayers who choose to restructure their arrangements.

According to Treasury, rollover relief is proposed to be available for three years from 1 July 2027 in connection with the discretionary trust changes.

The purpose is to make certain restructuring transactions easier from a tax perspective.

However, rollover relief does not necessarily mean that restructuring will be completely cost-free.

Business owners may still need to consider other costs and consequences associated with changing ownership structures.

Why State Taxes Still Matter

One important consideration when restructuring a trust is that federal tax treatment is not the only issue.

Depending on the transaction and assets involved, state and territory taxes may also need to be considered.

For example, transferring property or other assets between structures can potentially raise questions around stamp duty and other state-based taxes.

This is one reason a restructuring decision should not be based solely on whether the Federal Government provides rollover relief.

The complete transaction needs to be assessed.

Should You Move Your Discretionary Trust to a Company?

Not necessarily.

A company can provide different tax and legal characteristics, but moving from a discretionary trust to a company is a significant structural decision.

Business owners should consider:

Tax

Understand how income will be taxed under the proposed trust rules compared with the alternative structure.

Asset Ownership

Determine which assets are currently held by the trust and what would happen to them if the structure changed.

Legal Considerations

Changing structures can alter control, ownership, and legal relationships.

State Taxes and Duties

Check whether the proposed transaction could trigger state-based taxes or duties.

Future Flexibility

Consider whether the new structure will continue to suit the business as it grows.

Long-Term Objectives

A structure should support the business owner’s broader goals rather than simply solve one year’s tax problem.

What Should Business Owners Do Now?

Business owners do not necessarily need to immediately restructure their discretionary trusts.

The first step should be to understand how the proposed changes could affect their particular circumstances.

Consider reviewing:

• Why the trust was originally established
• Current trust assets
• Current beneficiaries
• Historical distribution patterns
• Business activities
• Investment activities
• Current tax outcomes
• Future growth plans
• Succession objectives
• Potential restructuring costs

This information can help an accountant and lawyer determine whether any action is appropriate.

Why You Should Not Rush Into Restructuring

Tax legislation can change between announcement, consultation, drafting and final enactment.

The practical rules can also be more complicated than a headline suggests.

For this reason, business owners should be cautious about making major structural changes based on preliminary information.

Restructuring a trust can involve significant legal, tax, and administrative consequences.

A decision that looks beneficial from a tax perspective may create other problems if the broader structure is not considered.

How Can an Accountant Help?

An accountant can help business owners assess their existing structure and understand the potential financial implications of the proposed changes.

This may include reviewing:

• Trust distributions
• Tax positions
• Business structures
• Investment assets
• Cash flow
• Beneficiary arrangements
• Potential restructuring options
• Future tax planning

Where legal issues are involved, an accountant may also work alongside a solicitor or other appropriately qualified professional.

The goal is to ensure the business owner understands the implications before making a major structural decision.

Final Thoughts: Review Your Structure Before Making Changes

The proposed discretionary trust tax changes could represent a significant shift for Australian business owners who have traditionally relied on the flexibility of these structures.

Treasury currently states that a 30% minimum tax rate for discretionary trusts is proposed from 1 July 2028, with rollover relief proposed from 1 July 2027 to help eligible taxpayers restructure.

However, the right response will not be the same for every business owner.

Some trusts may continue to make sense because of their broader legal, asset ownership or succession purposes. Others may need to be reviewed because their original tax-planning objectives could be affected.

The key takeaway is simple:

Do not restructure a discretionary trust simply because you have heard that the tax rules are changing.

Instead, review your existing arrangement, understand the proposed rules and obtain professional accounting and legal advice before making any major decision.

Frequently Asked Questions About Discretionary Trust Tax Changes

What is the proposed tax change for discretionary trusts?

The Australian Government has proposed a minimum tax rate of 30% for discretionary trusts from 1 July 2028, subject to certain exceptions.

When are the proposed discretionary trust changes expected to start?

The proposed minimum 30% tax rate is scheduled to apply from 1 July 2028. The Government has also proposed rollover relief from 1 July 2027 to support eligible restructuring.

Will every discretionary trust be affected?

Not necessarily. The proposed rules include exceptions, and the impact will depend on the trust’s circumstances and the final legislation. Business owners should obtain advice specific to their structure.

Should I close my discretionary trust?

Not automatically. A discretionary trust may have purposes beyond tax planning, including asset ownership, succession and family wealth management. Its continued suitability should be assessed based on your circumstances.

Can I restructure my discretionary trust into a company?

Potentially, but restructuring can have tax, legal and state-based consequences. The proposed rollover relief may assist eligible restructures, but professional advice should be obtained before making any changes.

Will restructuring a trust trigger stamp duty?

It can, depending on the assets involved, the transaction and the relevant state or territory rules. Rollover relief at the federal level does not necessarily eliminate every state-based tax or duty consideration.

Should I change how my trust distributes income?

Do not change distribution arrangements solely because of the proposed reforms without obtaining professional advice. Fixed distribution arrangements can have broader tax and legal implications that need to be considered.

Should I speak to an accountant about the proposed trust changes?

Yes. An accountant can review your existing trust structure, distribution history and broader financial position and help you understand what the proposed changes could mean for your circumstances.

Speak to Latitude Accountants

If you operate a business or hold investments through a discretionary trust, now is a good time to review your structure and understand how proposed tax changes could affect you.

Latitude Accountants provides taxation, accounting, business advisory, structural advice, tax planning and superannuation services to Australian business owners and individuals.

Book a free consultation with Latitude Accountants to discuss your existing trust structure and understand what options may be appropriate for your circumstances.

📍 Sydney Olympic Park | Marrickville | Melbourne | Loxton
📞 1300 706 597
📧 info@latitudeaccountants.com.au

Disclaimer

This article provides general information only and does not constitute taxation, accounting, financial or legal advice. The discretionary trust tax changes discussed are proposed Government measures and may change before legislation is enacted. The application of any new rules will depend on the final legislation and individual circumstances. Business owners should obtain professional accounting and legal advice before restructuring a trust or changing their distribution arrangements.