Proposed Tax Changes on Discretionary Trusts and Capital Gains

The Australian government has proposed significant changes to the taxation of discretionary trusts and capital gains, with the final details still under consultation. The key proposals are outlined below.

A New Minimum Tax on Discretionary Trusts

• A 30% Minimum Tax: From 1 July 2028, a new 30% minimum tax will apply at the trustee level on the income of most discretionary trusts.

• End to "Income Splitting": Beneficiaries will receive a non-refundable tax credit for the 30% tax paid. This significantly reduces the tax benefits of distributing income to family members on lower tax rates.

• Impact on "Bucket Companies": The new rules effectively end the use of "bucket companies" to receive trust distributions at the corporate tax rate. Distributions to a company will be taxed at an estimated effective rate of 51% when combined with the 30% trustee tax.

• Exemptions: The tax will not apply to fixed trusts, deceased estates, complying superannuation funds, or income from primary production.

  
  

Key Exemption for Testamentary Trusts

Following significant feedback, the government announced a key exemption: income from discretionary testamentary trusts (trusts established under a will) will be exempt from the 30% minimum tax, provided they are created for genuine estate planning purposes. While the exact definition of "genuine testamentary purposes" is still being developed, the exemption is intended for trusts managing assets inherited from a deceased estate.

Capital Gains Tax Overhaul

• Replacing the 50% Discount: From 1 July 2027, the long-standing 50% CGT discount for individuals, trusts, and partnerships will be replaced with a new system.

• Indexation and a 30% Minimum Tax: The new approach will use an inflation-indexed cost base to calculate the real gain, which will then be subject to a 30% minimum tax.

• Past Gains Protected: This new regime will apply only to gains that accrue after 1 July 2027. For assets sold after this date, the gain will be split: the portion up to 1 July 2027 will still qualify for the 50% discount, and the portion after will be taxed under the new rules.

• Small Business Concession: In a significant change, the turnover threshold for the small business 50% active asset CGT concession will be increased from $2 million to $10 million, making it available to 98% of Australian businesses.

The proposed tax changes have prompted many investors to reassess not only the assets they invest in, but also the structures through which those investments are held. These changes are currently proposed and subject to the legislative process. Ongoing consultation is occurring on some of the more complex elements, so the final details may evolve

In the next Labassa Insights article, we will explore relevant tax considerations for real estate investors.