For decades, the discretionary trust has stood as a cornerstone of wealth management, estate planning, asset protection, and tax efficiency. It’s the vessel through which multi-generational farms, small electrical businesses, law firm practices, and expansive investment portfolios have been managed and grown.
Yet, a fundamental change is on the horizon. With the government’s redrafted legislation introducing a 30% minimum tax floor for discretionary trusts from 1 July 2028, the status quo is set to expire. For the custodians of Australia’s 840,000 discretionary trusts, this isn’t an administrative update; it’s a catalyst for the most significant structural decisions in a generation.
The end of trust flexibility
The primary allure of the discretionary trust has always been its flexibility. By allowing trustees to distribute income to beneficiaries across different marginal tax brackets, these structures have effectively functioned as tools for tax optimisation.
When successful business owners or high-income professionals could distribute funds to family members on lower tax rates, the aggregate family tax bill was reduced.
The impending 30% tax floor fundamentally challenges this flexibility. It targets the “income splitting” mechanism, aiming to ensure that income distributed through these trusts does not escape a base level of taxation.
For those who have relied on these structures to manage their financial affairs, the upcoming change necessitates a rigorous reassessment of whether the discretionary trust remains the most efficient vehicle for their specific circumstances.
Stay, fold, or restructure?
As 2028 approaches, high-net-worth professionals and business owners face a series of critical, and often complex, decisions. The optimal path depends heavily on the nature of the assets held and the long-term objectives of the trust.
1. Maintaining the status quo
For some, the discretionary trust will still offer value beyond tax minimisation. Asset protection, the ability to keep control within a defined family group, and the orderly transfer of wealth to future generations remain significant, non-tax benefits.
If the primary purpose of the trust is not strictly tax-driven, maintaining the structure and accepting the higher tax floor may be a pragmatic decision. However, this requires a clear-eyed calculation of whether the administrative costs and the new tax burden outweigh the benefits of protection and control.
2. Restructuring into a company
Restructuring a trust into a company is a commonly discussed alternative, particularly for active businesses. Companies already operate under a corporate tax rate that may be more aligned with the new 30 % floor.
However, this is far from a simple switch. It involves potential capital gains tax (CGT) consequences and stamp duty considerations, though the government has flagged potential relief measures, such as temporary rollover relief, to assist with these transitions. The complexity of moving assets out of a trust and into a new corporate structure cannot be overstated, and it requires meticulous planning to avoid significant tax leakage.
3. Winding up
In certain scenarios, particularly where the trust holds limited assets or was created primarily for income splitting that is now obsolete, winding up the trust may be the most straightforward, albeit final, option. This process involves the formal distribution of assets to beneficiaries and the closure of the trust’s accounts. The tax implications of such a distribution must be carefully managed to avoid triggering unexpected personal tax liabilities for those receiving the assets.
Four families, four different answers
So, what is the right response? It depends far more on what the trust holds and does than on the tax rate alone. The four scenarios below are composites, not real clients, but each reflects a type of family the change will affect.
The multi-generational farm
A family trust owns about 400 hectares in the Western District, worked by two siblings, with a third sibling living in Melbourne. Income varies from season to season, and the land makes up most of the family’s wealth.
What the floor changes: In lean years, distributions to lower-income family members currently carry little tax. Under a floor, that flexibility shrinks.
Why winding up or restructuring is costly: Moving land out of the trust can trigger Victorian duty and capital gains tax. It can also put at risk concessions that may apply to primary production land. These costs can easily outweigh years of extra income tax.
The likely focus: Keep the structure, but deal with succession now: who controls the trust, how the non-farming sibling is treated fairly, and whether the deed’s vesting date is coming up. For this family, the tax change is mostly a prompt to tackle governance.
The technology founder
A founder in their late thirties set up a software business in Cremorne eight years ago. Their founder shares sit in a family trust. The business has taken on outside investment, and a sale or later funding round is possible within a few years.
What the floor changes: Very little while the business pays no dividends, but a great deal on any large distribution of sale proceeds or income. Moving the shares out of the trust could trigger CGT and put at risk the 50% CGT discount and possibly the small business CGT concessions, depending on eligibility.
The option of maintaining the trust: For a founder, moving the shares now usually costs more than it saves. Transferring them to a company or to the founder personally is generally a CGT event, valued at market rates. That could mean tax on a large unrealised gain years before any sale proceeds arrive. Investor agreements may also restrict transfers or need consent. Keeping the shares in the trust preserves access to the CGT discount and any small business concessions, and keeps options open until the final rules on capital gains are known.
The likely focus: Usually keeping the shares in the trust and planning the timing of a sale and how proceeds will be distributed. The crucial unknown is how the floor will treat capital gains under the final rules, along with any transitional arrangements. That alone makes waiting for the final legislation, with modelling ready to go, a sensible approach.
The law firm partner
A senior partner at a CBD firm holds their interest through a trust, which has historically distributed to a spouse on a modest income and to adult children.
What the floor changes: Distributions to lower-income family members would lose much of their tax benefit.
The complication: Income from professional services is already closely examined under the personal services income rules and the ATO’s guidance on professional firm profit allocation. A company doesn’t automatically solve that, and a structure built mainly around tax can attract more ATO attention.
The likely focus: Check whether the trust still gives real value in asset protection and flexibility. Also look at whether partnership agreements or firm rules limit how the interest can be restructured. For some partners, keeping the trust and accepting the higher tax may be the simplest choice that holds up best.
The heir to a portfolio
A beneficiary in their forties inherited control of a trust holding a listed share portfolio and two investment properties in Melbourne’s inner east. The assets are passive, and most of the return comes from long-term capital growth.
What the floor changes: It removes some of the benefit of spreading income such as dividends and rent across the family.
Why a company may be the wrong answer: Companies don’t get the 50% CGT discount. For a portfolio driven by growth, losing the discount can cost much more than the floor does. Moving the properties would also bring duty and CGT costs.
The likely focus: Model the after-tax return over the expected holding period, not just one year’s income. Also review whether the investment mix and the timing of distributions still suit the new rules. Keeping the trust may well remain the better option.
What the four have in common
None of these families has the same answer, but each starts in the same place:
- an accurate list of what the trust owns, and what it owes;
- modelling over several years, not a single-year snapshot;
- a clear view of the costs of changing structure, especially duty and CGT;
- an honest assessment of what the trust offers apart from tax.
Finding clear strategies
There is no “one-size-fits-all” solution. The right option for a family farm is vastly different from that of a city-based professional firm. The decision-making process must begin with a comprehensive review of the trust deed, the current asset base, and the anticipated future income stream.
One of the most dangerous approaches is to delay action. The lead-up to 2028 is a window of opportunity to plan, model different scenarios, and, if necessary, implement structural changes while legislative support, such as potential rollover relief, may be available.
Waiting until the final months risks rushing decisions that will have lasting financial consequences for decades.
The road ahead
- Model the impact: Engage with wealth management services and tax accountants to model the impact of the 30 % tax floor on your specific trust’s historical and projected income.
- Review your trust deed: Understand the specific powers granted to the trustee. Can the trust be easily restructured, or are there limitations in the deed that require amendment?
- Consider long-term objectives: Are you prioritising short-term tax efficiency, or is the long-term protection and transition of assets the primary goal?
- Get integrated financial planning: Because these decisions touch on tax, law, estate planning, and business operations, ensure that your team (accountants, lawyers, tax specialists, and others) is working in concert.
Start now with a proactive mindset
The upcoming changes to discretionary trusts represent a moment of transition. While the shift away from the traditional benefits of income splitting may feel restrictive, it also provides a necessary impetus to review whether the structures established years or even decades ago are still the most effective tools for your current and future needs.
For those who treat this not as an unwelcome disruption but as a trigger for strategic tax planning, the next few years offer the chance to refine, modernise, and secure their financial structures for the next generation. In the world of financial management, foresight remains the most valuable asset of all.
FAQs
Will family trust beneficiaries get credit for tax the trustee has already paid?
This is one of the most important design questions, and the answer depends on the final legislation. Under the proposal, the trustee pays the tax. Whether beneficiaries can then claim credits, and whether surplus credits are refundable, will decide how much the measure really costs your family. Ask a leading Melbourne personal financial manager and wealth management specialist to model a few scenarios rather than assuming credits will fully cancel out the extra tax.
Does moving assets into a company mean losing the CGT discount?
Yes, that’s a real trade-off. Companies don’t get the 50% capital gains tax discount that individuals and trusts can pass through. If your trust holds assets that will grow a lot, like property or a share portfolio held for the long term, a company could mean more tax when you sell. A company may suit an active trading business better than a passive investment portfolio. Speak to a Melbourne tax accountant who specialises in wealth management to find your best option.
Will rollover relief cover Victorian stamp duty?
Don’t count on it. The proposed rollover relief is a federal measure aimed mainly at income tax and CGT. Stamp duty is set by each state, so transferring Victorian land or business assets to a new entity could still attract duty unless a state exemption applies. For farms and property-heavy trusts, duty can be the biggest cost of restructuring, so get Victorian-specific tax help early.
Are all trusts caught by the minimum tax?
No. The measure targets discretionary trusts, and commentary on the draft legislation points to some exemptions and carve-outs. Fixed unit trusts, superannuation funds and certain other arrangements are generally treated differently, but where exactly the lines fall matters. Check with your accountant or financial manager to find out whether your trust deed is genuinely discretionary in practice, because some “hybrid” trusts or family arrangements don’t fit neatly into either category.
