Family and business trusts could soon have to pay more tax – with a few likely exceptions
- Written by Donovan Castelyn, Senior Industry Fellow - Taxation and Director of the UTAS Tax Clinic, University of Tasmania
Should some of Australia’s more than 1 million family and small business trusts face higher taxes in future, bringing them closer to what ordinary wage earners already pay in income tax?
We’re about to find out on Tuesday night.
Trusts are widely used by farmers, family businesses, professionals, property investors and high-income households because they can provide flexibility, asset protection and succession planning benefits. They can also be used to reduce people’s income tax.
Over recent weeks, there’s been mounting, well-sourced media speculation that the Albanese government will revisit a Labor policy from 2019 for a flat 30% tax on some trust payments.
Speaking at a national tax summit last year, leading tax researcher Miranda Stewart pointed out that while some Australians had the money and means to set up trusts to reduce their tax bills, “Your average punter is having tax taken out of their pay every fortnight”.
But what is a trust? What proposals for change are being seriously considered ahead of Tuesday’s budget? And which Australians are most likely to be exempt from any changes that may be on the way?
1.8 million Australians benefit from trusts
Some individuals own assets – such as money, land, shares or a business – on their own.
But another common way to own those same assets is through a trust, most commonly a “discretionary trust”.
A trust acts like a bucket. Assets or businesses are placed inside that bucket, and the income earned from them is managed by a person or entity known as the trustee.
The income of the trust can then be distributed at the trustee’s discretion to people known as beneficiaries, who are often family members.
Trusts are more common than many people realise, and there is a significant amount of money involved. According to the most recent Treasury figures,
Around 1.8 million individuals (11% of tax filers) reported a total of around $71.3 billion in trust net income in 2022–23.
How trusts are used
The Australian Taxation Office (ATO) says most trusts are used in legitimate ways. For instance, if you own a family farm and you want to oversee who’ll inherit your land, machinery and more, trusts can make that easier to manage.
But research prepared for the ATO in 2019 estimated Australia could be losing at least A$1 billion a year through aggressive trust-related tax planning by wealthy individuals.
How trusts can lower people’s tax bills
One reason trusts have become politically contentious is that they can allow income to be split between family members on lower tax rates.
For example, a worker earning A$100,000 as a salary would currently pay about A$22,788 in income tax (including the Medicare levy).
But according to modelling in independent MP Allegra Spender’s recent tax white paper, if the same $100,000 income is earned through a family trust and distributed evenly between two adults, including a non-working spouse, that tax bill could fall to around A$13,576.
That difference arises because Australia’s progressive tax system applies lower tax rates to lower incomes. By splitting trust income among multiple beneficiaries, some families can reduce the amount that is taxed at higher marginal rates.
What’s being talked about ahead of the budget?
The federal government has not officially confirmed it’s considering changes to how trusts are taxed.
But the idea behind Labor’s previous trusts proposal – announced in 2017 and sounding similar to speculation ahead of this budget – is to try to level the playing field with salary and wage earners.
According to one news report, if Labor proceeds with a plan to introduce a 30% flat tax on all discretionary trust payments to adult beneficiaries, it could bring in $4–$5 billion in revenue over the next four years.
Why farmers and others are likely to be exempt
Back when Labor proposed a 30% tax on trust payments before the 2019 election, there were planned carve-outs – meaning not everyone would have to pay.
These included exemptions for charitable trusts, deceased estates and testamentary trusts (established under wills), along with hardship concessions.
Farmers were also exempt under Labor’s 2019 proposal. And there’s a reasonable case for why they should be.
Farmers are typically asset rich – such as in land and machinery – but cash poor. They also tend to have more volatile incomes than many other types of business.
However, any time a new tax is designed with built-in exclusions, you can expect to see pushback from other groups.
For many of the 1.8 million Australians who received income from trusts, Tuesday night’s budget speech will now be mandatory viewing.
Authors: Donovan Castelyn, Senior Industry Fellow - Taxation and Director of the UTAS Tax Clinic, University of Tasmania
