The Federal Government’s proposed 30% tax on trust distributions represents one of the most significant trust tax reforms in decades. While much of the immediate commentary has focused on the headline rate itself, the practical implications run far deeper, particularly for family trusts, bucket company arrangements, and testamentary discretionary trusts.
To unpack what these reforms could mean in practice, The Education Network’s Chief Executive, Robert Clemente, sat down to discuss how the new regime is expected to operate, who is likely to be most affected, and why advisers should already be planning for change well before the proposed 1 July 2028 commencement date.
Q: Rob, how will the Government’s proposed 30% tax on trust distributions work in practice?
A: Deceptively simple. At the moment, trusts are only taxed on any portion of net income of the trust estate that has not been distributed – under section 99A – and at the top marginal rate (47%) plus the Medicare levy. Trust distributions are taxed in the hands of the beneficiaries under the current law.
Under this new proposal, the trustee will pay 30% on that portion of the net income under section 95 that is distributed to beneficiaries. This will apply to all distributions from 1 July 2028.
Beneficiaries receiving distributions will still be taxed but will receive a non-refundable tax offset representing that portion of the trust income to which they are presently entitled, this to avoid double taxation.
Q: What happens when part or all of the income of the trust estate consists of franked dividends?
A: The trustee will be required to claim the franking credit against the distribution tax payable. What is not clear is how that affects the quantum of the tax offset available to the beneficiaries. If the quantum is the net tax paid by the trustee, there will be a problem.
Q: Do all beneficiaries receive the tax offset?
A: No. The most important category of non-recipients are corporate beneficiaries – aka bucket companies. They will not receive the tax offset. This will result in double taxation and will, if implemented as stated, spell the end of bucket companies.
Q: What about fixed trusts and super funds?
A: Neither will be affected by this reform. Fixed trusts could be useful in some cases but be aware of the extremely strict interpretation of the meaning of fixed trusts – the presence of any discretion at all will result them not being fixed trusts for tax purposes.
Q: How will the new tax affect your typical family business run through a trust?
A: It depends on the levels of income of the trust and the tax position of the beneficiaries. Trusts with substantial income will still be tax advantaged. A trust with income of $1 million let’s say with the beneficiaries being a couple of university aged kids and Mum and Dad. Mum and Dad’s effective tax rate will be above 30% anyway so the trust distributions tax will just be a compliance nuisance. But distributions to university age children above will be far less effective – the children will only get a benefit if they can use the full tax offset. Children with no or little other income will be disadvantaged for this reason.
Q: What about testamentary discretionary trusts?
A: Testamentary trusts in existence on budget night are unaffected – the trustees will not have to pay trust distributions tax at all. Those established after budget night will be subject to the tax, so estate planners will have to give careful thought to their use in future. Distributions to minors will still be excepted trust income but the 30% distributions tax will significantly reduce their tax efficacy. Once again, if the parents are paying the top marginal rate, there will be some advantage.
Q: Why do tax advisers need to get their minds around this now?
A: Most trust structures use bucket companies and these structures will require rethinking now as the arrangements involving them often have long tails. Families with trusts with incomes of $200,000 to $300,000 will need to rethink their structure and may have to use the proposed rollover to get out of the current structure into something else. Given that the new system takes effect from 1 July 2028, the new structure will need to be in place by the end of FY28, which requires planning to start soon.
Q: Rob, what’s The Education Network doing to help tax advisers now?
A: Nathan Yii, one our best trust presenters, will be presenting a webinar on the reforms on 22 June 2026. This will offer you the perfect opportunity to get your head around the reforms now so you can start your forward planning in good time. Watch it live online or on demand.
