The Federal Government has recently released a consultation paper on one of the most significant proposed changes to the taxation of discretionary trusts in decades.

As part of its broader tax reform package, the Government proposes introducing a minimum 30% tax on discretionary trust income from 1 July 2028. To facilitate restructuring ahead of those changes, the Government has also announced expanded rollover relief, available for a three-year period from 1 July 2027. This will allow eligible taxpayers to restructure out of discretionary trusts without triggering immediate income tax consequences, including capital gains tax (CGT).

While the legislation has not yet been released, these proposed changes are likely to have a significant impact on many privately owned businesses that currently operate through discretionary trust structures.

Why are these changes being introduced?

The proposed rollover relief is a direct response to the Government’s proposed minimum tax on discretionary trusts.

Under the proposed regime:

• trustees of discretionary trusts will continue to determine which beneficiaries are presently entitled to trust income each year;
• beneficiaries will continue to include their share of trust income in their own tax returns; however
• the trustee will be required to pay 30% tax on the trust’s taxable income (unless a higher rate already applies).

Individual and other non-corporate beneficiaries will receive a non-refundable tax offset for the tax paid by the trustee, reducing their own tax liability. However, the effect of the changes is that trust income will generally be subject to a minimum tax rate of 30%, regardless of the beneficiaries’ lower marginal tax rates.

What about bucket companies?

One important integrity measure to mention is the treatment of corporate beneficiaries.

Under the proposal, corporate beneficiaries will not receive credits for the tax paid by the trustee. This means tax may be payable at both the trustee and corporate-beneficiary levels.

This is designed to prevent taxpayers from avoiding the minimum tax by distributing trust income to a “bucket company”. As a result, one of the most common tax planning strategies currently used by discretionary trusts may no longer provide the same tax advantages under the new regime.

The proposed rollover relief

Recognising that many businesses may wish to move away from discretionary trust structures following these changes, the Government has announced that expanded rollover relief will be available for three years from 1 July 2027.

The proposed rollover is intended to allow taxpayers to restructure from a discretionary trust into another entity, such as a company or a fixed trust, without triggering direct income tax consequences, including CGT.

Importantly, the new rollover will be based on the existing Small Business Restructure Rollover (Subdivision 328-G of the Income Tax Assessment Act 1997), but with several significant enhancements.

Unlike the existing Small Business Restructure Rollover, the proposed relief would:

• not be limited to small business entities;
• not require a “genuine restructure” of an ongoing business;
• be available to discretionary trusts within the scope of the minimum tax regardless of their size;
• apply to active business assets, revenue assets and assets used to produce passive income, substantially expanding the types of assets that may be transferred under the rollover;
• not require continuity of identical legal ownership following the restructure; and
• accommodate changes in legal ownership through companies, partnerships or other entities, provided the ultimate economic ownership remains within the same family unit.

This represents a significant expansion of the existing Small Business Restructure Rollover, which is generally limited to active assets used in a business and is only available to entities satisfying the small business eligibility requirements. By contrast, the proposed rollover is intended to facilitate the transfer of virtually all categories of assets held by a discretionary trust, including passive investment assets, while removing the existing size limitations.

Although the proposed rollover is broader than the existing relief, it is expected to be subject to eligibility conditions and integrity rules.

The detailed legislation is yet to be released and the precise mechanics, eligibility criteria and integrity provisions should be considered once draft legislation becomes available.

Why might businesses restructure?

For many business owners, operating through a discretionary trust has historically provided flexibility to distribute income among beneficiaries in a tax-effective manner.

If the proposed minimum tax proceeds, some businesses may decide that another structure is more appropriate.

For example, a company may offer several advantages, including:

• access to the 25% corporate tax rate (where eligible);
• access to the dividend imputation system;
• greater flexibility in retaining profits for future business growth; and
• easier introduction of new investors or shareholders.

Similarly, some groups may consider moving to a fixed trust where appropriate, noting that the proposed minimum tax would not apply to fixed trusts.

What does this mean for you?

While the proposed rollover relief is a welcome change, there are still many issues that will need to be considered before deciding whether a restructure is appropriate, including:

• whether a company, fixed trust or another structure better suits your long-term commercial objectives;
• the potential impact on asset protection and succession planning;
• financing arrangements and banking requirements;
• state taxes, including whether any transfer duty relief will be available; and
• the detailed eligibility requirements for the proposed rollover relief once legislation is released.

Importantly, not every discretionary trust should or will need to restructure. Trusts continue to provide significant commercial advantages beyond tax, including:

• asset protection;
• succession planning; and
• flexibility in ownership arrangements.

The proposed rollover relief simply provides an opportunity for businesses to review whether their existing structure remains the most appropriate in light of the proposed tax changes.

What should you do now?

Although the minimum tax is not proposed to commence until 1 July 2028, now is an appropriate time for businesses operating through discretionary trusts to begin reviewing their structures.

The consultation process is currently underway, and the final legislation may differ from the proposals. Nevertheless, business owners should understand how the reforms may affect them and begin considering whether restructuring may be beneficial.

We expect further detail regarding the rollover relief and the operation of the new minimum tax once legislation is introduced. Until then, any restructuring should be undertaken carefully, with consideration given to the broader legal, commercial and taxation implications, not just the proposed trust tax changes.

Kara Bentley
Senior Associate