Govt says trust changes will only impact minority of small business

The government says tax changes to discretionary trusts won’t impact 90 per cent of small businesses as it consults on reforms proposed in the May federal budget that will include rollover relief for those wanting to change structures.

The government announced a consultation on discretionary trusts reform implementation on Wednesday evening, following on from changes introduced in the polarising FY27 federal budget.

From 1 July 2028, trustees will be required to pay the 30 per cent minimum tax on taxable income from discretionary trusts, and the government said over 90 per cent of small businesses will not be affected by the change.

“The minimum tax on discretionary trusts won’t change or limit the use of trusts for legitimate reasons, but will more closely align the tax rates for trusts with the tax rates paid by workers and families who earn a living from wages,” Chalmers said in a statement.

The minimum tax will not apply to other types of trusts, such as fixed trusts, widely held trusts, complying superannuation funds, special disability trusts, deceased estates and charitable trusts.

Small businesses operating through discretionary trust structures will be eligible for rollover relief if they want to restructure to a different type of entity – for example, a company or fixed trust – without capital gains and other immediate income tax consequences applying. The relief will be available for a period of three years commencing from 1 July 2027.

Businesses that choose to restructure into a company will be able to retain income at the corporate rate, but companies cannot access the capital gains tax discount or indexation.

The government will also exempt income from all types of discretionary testamentary trusts that are established for genuine testamentary purposes from the minimum tax.

The consultation will also seek feedback on the implementation of core arrangements for discretionary trusts, including exclusions; the treatment of distributions to income‑tax exempt entities like charities; the treatment of excess franking credits; and collection mechanisms to support the minimum tax.

Chalmers said the reforms are all about making the tax system “fairer” by better aligning the tax rate on trust income with tax rates paid by workers and will help fund income tax cuts for workers.

“Creating a fairer tax system is a key aim of our ambitious tax reform package, along with making it easier to buy a first home and cutting income taxes for workers again and again,” Chalmers said.

“Discretionary trusts allow some people to plan their tax affairs in ways that aren’t available to most Australians.”

As part of the May federal budget, the government introduced changes to the 50 per cent CGT discount which will be replaced by cost-base indexation for assets held for more than 12 months, with a 30 per cent minimum tax on net capital gains.

Investors in new residential properties will still get negative gearing concessions and will be able to choose either the 50 per cent CGT discount or the new cost-base indexation regime.

Existing negative gearing arrangements will be grandfathered but will be eliminated on new purchases with the exception of new residential properties.

The changes to CGT will apply to all asset classes, including shares.

The government has made tweaks to the reforms after fierce public criticism of the reforms, including from the small business and start-up sectors, which have argued they would miss out on compensation via investment returns while forgoing taking a salary.

Changes have since been made to lift the small business exemption from the CGT changes to $10 million of annual revenue.

However, the government has also ended limited recourse borrowing arrangements (LRBAs) in SMSFs for residential housing.