The trust tax carve-out that satisfied nobody

A 30 per cent minimum tax on discretionary trust income is in Parliament. The small business exemption meant to soften it has cost the government the votes it needs to pass it.

The federal government introduced legislation this month imposing a minimum 30 per cent tax rate on income distributed from discretionary trusts. The policy targets a specific advantage: in a discretionary trust the trustee decides how income is split among beneficiaries, and tax is paid at each beneficiary's marginal rate, which allows income to be directed to whoever sits lowest on the scale. Treasury analysis cited in support of the change found families using discretionary trusts faced an average tax rate around four percentage points below comparable families who do not use one.

Trusts are also ordinary infrastructure for Australian family businesses, used to hold assets, separate trading risk and manage succession. The government's answer to that was a carve-out for small business, and the carve-out is now the problem.

Greens economics spokesman Nick McKim has said the party will move for a Senate inquiry into the exemptions, arguing the government has diluted its own position before the bill reached the chamber and risks turning a worthwhile reform into a missed opportunity. The Coalition opposes the bill outright, with Liberal Senator Michaelia Cash describing the effect as taxing small businesses twice. 

Shadow Treasurer Tim Wilson sought to refer the bill to the Senate economics committee and was refused. Because the Coalition will not be won over by amendment, the government needs the Greens regardless of where the inquiry question lands, which means passage before the end of 2026 is now unlikely.

The contested number is the cost of compliance rather than the cost of the tax. Treasury expects around 210,000 business trusts to be affected and the measure to raise $4.5 billion. Wilson Asset Management and CPA Australia estimate those trusts face between $8 billion and $13.3 billion in advice and restructuring costs, with state stamp duty on transferring property or other assets adding more on top. Treasurer Jim Chalmers has countered that fewer than 10 per cent of small businesses are affected at all.

Both figures deserve scepticism. The compliance estimate comes from bodies whose members would perform the restructuring, and a one-off advisory cost is not the same category of expense as a recurring tax. The government's 10 per cent figure, meanwhile, measures how many businesses are touched rather than how heavily, and a measure that lands hard on a tenth of the sector is not a small measure.

Professional bodies have raised narrower technical concerns that will matter more in practice: how the rules treat charities, how a trust switching to fixed distributions is handled, and a cap on distributions to tax-exempt entities such as sporting clubs and schools that the government has described as reasonable without yet setting it.

If your business runs through a discretionary trust, the worst move available is restructuring now. The carve-out is the live political question, its boundary is what the inquiry will examine, and a restructure undertaken against the current draft could be the wrong answer by autumn and will cost stamp duty either way. Book the conversation with your accountant, get a written view on which side of the threshold you sit and what a distribution year looks like under the bill as drafted, then wait. This does not pass in 2026. Expect the carve-out to be narrowed rather than widened as the price of Greens support, which means businesses sitting just inside it today are the ones who should be paying closest attention.